MorningWord 4/19/13: Does Recent Vol Spike Suggest Winter is Coming this Summer? $SPX, $VIX

by Dan April 19, 2013 9:26 am • Commentary

Reminder: Enis and I will be Hosting a Free Webinar on Monday April 22nd at 4:15pm EST previewing AAPL’s Q2 earnings report and we will debate 2 options trade structures that we are considering to play the event.  Register here:

MorningWord 4/19/13:  Earnings seasons kicked off in earnest late last week/ early this week  with large financials that despite being in-line-ish have officially put most of the stocks in an official correction (down 10% at least from recent highs).  Late this week the main earnings event was large cap tech with results from EBAY, YHOO, GOOG, IBM & MSFT.  For the most part it has been a mixed bag with plenty of inline qtrs and slightly downbeat guidance for Q2 (aside from IBM that missed and guided lower).

It’s not a coincidence that earnings seasons has caused volatility to pick up this week with average moves in the SPX of about 1.4% for the first 4 days of this week.  U.S. equities have been the beneficiary of the “flight to quality” trade OUT of Europe and emerging markets, but now as the realization that a stagnant global economy will ultimately take its toll on U.S. multinationals sales overseas, stocks here have stalled here too (albeit from recent all time highs).

There were plenty of warning signs suggesting the potential for a mid year economic pause heading into Q2, and not all were related to a weak global economy,  remember that March non-farm payrolls number?  This week’s volatility could be the pre-cursor for a higher volatility regime as we head into late spring/summer, much the way  we have seen for the last 3 spring/summer spikes in the VIX off of 52 week lows.  (Enis had a nice MacroWrap this morning contemplating the depth of the potential decline, read here).

VIX 3 yr chart from Bloomberg
VIX 3 yr chart from Bloomberg

IN all three situations (above) of spring/ summer vol spikes, the SPX saw double digit peak to trough declines (below).

SPX 3 yr chart from Bloomberg
SPX 3 yr chart from Bloomberg

So with realized volatility starting to pick up in the broad market, and volatility in actual corporate earnings and economic data also starting to pick up, we could be in for a bit more downside.  While I remain cautious on equities as an asset class, I will look for opportunities to add longs to my trading book when I identify a disconnect btwn price actions and fundamentals (possibly EBAY soon) but given the recent uncertainty about the state of global growth and the extreme volatility in commodities this week, buying the SPX down 3 from all time high seems a tad premature.


MorningWord 4/18/13:   Last night on Fast Money the crew had one of our infrequent discussions about AAPL, specifically what the company needs to do and say when they report their fiscal Q2 on Tuesday to allay investor fears that the company’s best growth and innovation are behind them.   Yesterday’s price action in the stock, down 5.5% and making a new 16 month closing low, was downright horrendous and for the first time on its descent I will suggest that it neared capitulation, capping an almost 43% decline from the all time highs made in September.

Yesterday in his Chart of the Day, Enis overlaid AAPL’s run over the last 5 years to that of MSFT’s performance  from 1996 to 2001 during its own rise and fall from cult growth stock to downtrodden value stock.  This comparison may be fairly constructive from a technical perspective as investors try to get their arms around what this transition can look like for a large cap tech stock.

From a fundamental standpoint, AAPL’s challenges are well known and I will summarize a post from Henry Blodget on Business Insider on the topic on Tuesday (here):

  • Apple’s earnings are no longer growing.
  • Several reports have suggested that orders for Apple’s key product, the iPhone, will be weak this quarter and next quarter
  • Apple refreshed its entire product line last fall, and we’re still in the middle of a new-product blackout period.
  • Apple’s amazingly high profit margin is declining and is likely to continue to decline over the next several years.
  • One of Apple’s next revolutionary new products — a TV or TV device of some sort — always seems to be about a year away, with the expected date of release perpetually getting pushed farther into the future.
  • The smartphone market, which has driven Apple’s spectacular iPhone sales over the past 5 years, has entered a new phase, in which low-priced phones are capturing most of the market share.
  • Apple’s competitors have caught up in smartphones and tablets (and now, possibly, in prospective TVs and watches), so Apple no longer has the leverage with distributors and consumers that it once did
  • Lastly, Apple really has finally entered the “post-Steve Jobs” era, and it remains to be seen how successful the company’s next generation of leaders and products will be.

OK so none of these reasons should be new to any of us AAPL followers, but they are the reasons that were discounted during the stocks ascent from $400 to $700, defended from $700 to $500 and now could be the catalyst to own the shares below $400 as the company aggressively tackles each issue one by one.

Last night on the show I said that I think the Stock will be the “Buy of the Century on the next Puke”.  My friend DrJ of OptionsMonster tweeted it out and we got a fairly funny response by many as to my verbiage.

Dan Nathan  RiskReversal  on Twitter

The main point I was trying to make is that here is a company that went from being the most valuable company  in the world in September, making what I think is safe to say the best computing products for the highest profit  margins ever for such devices, to basically not, in a matter of 7 months.  I have not tried to pick a bottom in the stock, because I have had the strong belief that it will not bottom until max pain has been realized by almost every investor during what I will call its “bubble phase” of 2012.  We are almost there – the stock has basically round-tripped the entire move since investors once contemplated what a Post Jobs AAPL would look like shortly after the founder’s death.

But at ~$400 the stock is finally getting really really cheap,  with a ~$380 billion market cap, about 40% of that is in cash on their balance sheet, and is equal to their sales in 2012.  As Scott Krisiloff wrote on his blog yesterday (here):

the enterprise value of the company has shrunk to levels which value the company at around the same price as three of its most comparable competitors: GOOG, MSFT and Samsung.  On a market cap basis, Apple still looks like its worth significantly more than its competitors, but that’s mostly because the cash pile is so unfathomably large that it skews the whole market value of the company.

Does Apple the enterprise deserve to be worth less than Google, a company that does 1/3 of its revenue?  Only time can tell.  Mathematically though as cash becomes a larger and larger percentage of Apple’s market value, each additional percent decline in the share price means a bigger and bigger discount to the value of Apple’s business.

So I am not calling for a “generational bottom” or that the stock will re-take its past highs anytime soon.  I am simply saying that if the stock pukes, I used $375 in the near term, but the real technical range of massive support in my opinion is $350-375, I think there is a strong chance that could be the bottom once most of the bad news is realized (a miss slight miss to Q2, and downward guidance for Q3 and a only a modestly generous cash distribution plan, and of course no talk of new products).  At that point I will likely start dipping my toe in the water by selling a put spread (defined risk bullish strategy to take advantage of heightened volatility levels that will most certainly exist at those depressed price levels), and look to enter a long stock position with an intermediate term time horizon playing for what could be the mother of all V Bottoms on a Puke (puke meaning capitulation, down 5-10% from current levels, touching my line in the sand technical support level). IN full disclosure I was not a fan of AAPL in early 2012, prior to its parabolic run (read here) and almost every reason I cited in that post were the very reasons that ended up taking the stock down, after it rose almost 75% (yes I suck), so timing is certainly very important, and just because I nailed the reasons why the stock would eventually fall out of investors favor, I didn’t help the fact that I lost money routinely trying to be right before it was time, so to speak!  I am trying to be a bit patient on the flip-side and will wait for the opposite of the feeling I had on Sept 21st when AAPL touched $705.


MorningWord 4/17/13:  As Enis very aptly discussed this morning in his MacroWrap, realized volatility is starting to pick up a tad after one of the longest most benign periods of movement in the SPX in the last few years.  The main take-away from the post that in every instance when Realized Vol has picked up to current levels, Implied Vol (prices that traders are essentially paying for options) has almost always followed suit.   I would take this one step further to single stocks, as we head into one of the four most potentially volatile scheduled events a year for individual companies, Earnings.

For the most part we have just gotten underway, and many options traders like to track some of the early reports to get a sense for how accurate the options market is predicting potential moves following the earnings events.  By doing this they can get an overall feel for the risk/reward for owning or selling options in a period that historically causes spikes in single stock volatility.

We have constructed an Implied Event Move Calculator (here, read discussion of the calculation here) that we hope you play around with and get a sense for the expected moves of companies that you have positions in.  This exercise adds another input to what should we an almost daily re-evaluation of your trading positions, and force you to consider other ways to express your view, add yield, or use options for risk management purposes.

Lets look at INTC and YHOO that reported Q1 earnings last night.  INTC essentially reported an inline Q1 and offered  Q2 guidance that was inline with consensus.  The options market was implying about a 3.75% move into the report, vs the 4 qtr avg move of about 3.5%.  In the pre-market, the stock is trading down less than 1% after being up about 1% in the post market last night during the conference call.  I think it is safe to assume that the options market was over-pricing the potential for movement, as the stock now appears to be back in the broad markets hands for the balance of the day, meaning no positive or negative surprises to cause further volatility related to the report.

YHOO is a bit more interesting though, for the most part their Q1 results were inline with expectations, despite missing slightly on revs and offered Q2 guidance that was below consensus.   The implied move in YHOO was about 3.5% vs the 4 qtr average of about 3.15%. After initially popping in the aftermarket, the stock started to slide as some investors feel that the stock’s 55% move since Marissa Mayer took over as CEO has adequately discounted a good bit of any potential turnaround in their core U.S. business.  YHOO was down about 5% in the pre-market, until Bank Of America upgraded their rating on the stock , and now it is only down 2% ( I suspect it works back to the pre-market lows given the amount of fast money in the name).

My sense is that the options market adequately priced the potential for movement in YHOO as I expect the stock’s recent run up to be slightly vulnerable given what will be a couple month period of little fundamental news.  I am long a May 23/21 put spread (here) that I am content to sit with, but could be tempted to take profits on a double near what should be decent support at $22.

So in sum on YHOO, expectations and sentiment were running fairly hot, and after the 4 year high made in the stock just Monday, the options market appeared to be adequately pricing the potential for movement.

As for INTC with the stock being a massive under-performer relative to its peers and the broad market, expectations weren’t high and sentiment was very poor.  The options market was pricing close to the historical average but the set up didn’t not look nearly as attractive to play for such movement.

The current market backdrop could signal a hand-off from a micro market where individual stock stories dominated the headlines, to a more macro market where broader risk-on / risk-off moves make more of a difference to how stocks move on a daily basis.


MorningWord 4/16/13:  If you have ever been punched in the face you are not likely to forget the feeling for a very long time. Yesterday, for those that were long Gold and the last peeps to buy the highs in the SPX must have felt similarly.  With the VIX registering its largest one day increase ever, and the SPX having its worst decline of 2013, it is important to look under the hood and get a sense for the true technical damage that was done yesterday.

The Russell 2000’s failure to make new highs with the SPX suggests small cap stocks could be signaling a pause for U.S. equity out-performance.  Yesterday’s decline of 3.77% in the IWM, on massive volume demonstrated investor patience (or lack thereof) in holding some of the weakest issues in the market cap hierarchy.

IWM 1 yr chart from Bloomberg
IWM 1 yr chart from Bloomberg

The one year chart above shows the fairly precarious technical position the stock is in having broken the uptrend from the November lows, and now sitting right on near term support.

Looking at some of the specific sector activity doesn’t look a heck of a whole lot better.  Lets start with Homebuilders (XHB) which was one of the sectors that got us to new highs.  Yesterday’s almost 5% decline was one of the worst one day declines for the etf in years, coming at a time where many of the actual homebuilder components had topped weeks if not months ago, but was merely waiting for some of the retail components to join the party.  The one year chart below shows the uptrend that has been in place for the past year and how yesterday’s performance places the etf right on the uptrend, which is also on key near term support.


To further make this point look at TOL, a top ten holding in the XHB.  As I said above, this actual homebuilder topped out to make new 52 week highs all the way back in January and has made a series of lower highs and lower lows since.  Yesterday’s price action in the name was downright atrocious with a close down 7.7% on massive volume and quickly approaching 9 month support.  The 2 year chart below shows a similar pattern of the last few months last fall, the difference being then that it had held its uptrend line.

TOL 2 year chart from Bloomberg
TOL 2 year chart from Bloomberg

I guess I could go on an on, but the price action in many sectors and market cap weightings appears to be very similar.  I would add, though, that any divergent activity in the Banks would clearly be a positive as most U.S. banks showed very good relative strength for most of yesterday’s sell off on the heels of Citi’s results.   But to sum it up, this is not likely the dip you want to buy, until we get a better sense for U.S. corporate earnings guidance.

As I write at 9am, the S&P futures are up nearly 1%, I am hard pressed not to take one shot at shorting this open and play for a re-test of yesterday’s lows.


MorningWord 4/15/13:  Regular readers of this space know that I am the first guy to admit that I have no clue as to the real fundamental reasons that drive the price action in Gold (here is a good read from Mark Dow,  “A FrameWork for Thinking About Gold & Silver“, which is a good place to start), but I think it is safe to say that the shiny metal’s three day, ~10% decline through important support could be very telling for risk assets the world over.

Earlier this morning in his MacroWrap, Enis had a nice run through from a technical perspective and how the compressed volatility environment lead to an “escalator up, elevator down” situation in Gold & Silver.   While these 2 are catching all the headlines, there is some interesting action in crude this morning, at this morning’s lows, black gold was down ~6.5% since Thursday, and a little more than 10% from levels it traded at the beginning of this month.  Consumption commodities are obviously feeling the brunt as investors contemplate what slower growth from China looks like for the coming months (overnight China disappointed on Q1 GDP coming in at 7.7% vs 8% expectations).

All of this comes at time where the U.S. markets seem relatively immune to the continued credit issues in Europe and the relatively benign growth environment in emerging markets.  We have highlighted the SPX’s out-performance on more than one occasion this year and are of strong belief this is a very crowded “flight to quality trade” that could be particularly vulnerable.  Just this past week, George Soros predicted that Germany could enter a recession by the time the county has elections in the fall, could this be the final straw that breaks the camel’s back?

So once again after a great Q1, we head into a veritable Macro-ShitStorm so to speak.  Not to put too fine a point on this, but if U.S. corporate earnings disappoint and visibility is murky at best, then we could be in for the usual summer swoon.   I guess one thing that is important to remember when evaluating the risk reward of your current holds, is that IT IS NEVER DIFFERENT THIS TIME, and for those that think that the U.S. economy and the our risk assets will DE-COUPLE from those of the rest of the world only need to go back the GLOBAL credit crisis of the last five years to see the near impossibility of the potential for such a situation.  The obvious question is whether or not our economy can continue to power along (despite the disappointing March jobs data on Apr 5th), slower than expected growth from China, and the Euro-zone in perpetual stagnation.  IS our Fed’s monetary policy becoming increasingly less effective the longer it is in place?  I have no clue, but with U.S. equities at fresh all time highs and with all of these uncertainties abound, I am not sure buying the first 1-2% dip makes a whole heck of a lot of sense right here.

On the earnings front, we are focused on the following names this week, here are their implied moves and their 4 qtr averages:

  Implied  4 qtr avg
KO 2% 1.75
GS 3% 1.55%
JNJ 1.50% 1%
INTC 3.60% 3.38%
YHOO 3.25% 3.12%
BAC 2.60% 2.75%
EBAY 4% 7.25%
MS 3.70% 4.80%
GOOG 4.75% 4.40%
IBM 3.30% 4.10%
MSFT 3.20% 2.50%
GE 2% 2%
MCD 1.80% 2%


MorningWord 4/12/13:    #BitCoin – The Latest Sign of the Next Financial Apocalypse  

I am not sure about you guys, but I am getting a little tired of the first crap that I see on my Twitter feed in the morning, and the last turdlet at night about Bitcoin, and all the geniuses trying to parse out what this new phenomenon means for a world dead-set on debasing their hard currencies.  I am no economist and certainly no genius, but one thing is fairly certain to this market participant, the whole thing is a massive scam, and in a financial media environment that is getting a tad tired with daily “new all time high” headlines and “very special” programs on the price action, Bitcoin seems to be just the sort of story to re-engage the complacent investing public.

I don’t buy it, don’t waste a minute more on the topic (until I am done with my little rant of course), but if there has ever been a more obvious sign of asset bubbles popping up, this is it.  At some point in the next 12 months or so I suspect there will be a postmortem on why we failed at SPX 1600 (again) and the snarky ones will be pointing to Bitcoin as the “sign that the apocalypse was upon us”.  I’m just saying.  How that will help make you money you ask?  Simple answer, it won’t, but maybe just maybe it will shed a little light on some of the stupid goings on in the current investment environment.

Pivoting from fake investments, to real investments in single stock land, Enis had a great write up on his first impressions of JPM’s Q1 earnings results reported this morning (here).  There does not appear to be any fireworks in the report, but think back to a year ago this exact week, this was the time that CEO Jamie Dimon called the rumored losses in their CIO’s office a “Tempest in a Teapot”.

The “Disaster Dujour” is courtesy of India today, as INFY, one of the largest IT consulting firms in the world was down 20% in Mumbai (with its ADR following suit here) after issuing disappointing results and even worse guidance blaming an “even global recovery”.  I suspect this should weigh on some large cap tech shares like IBM, as it reinforces some of the sentiment displayed by ORCL last month.

In Sum, it will be very important to see how the financials act today in response to what appears to be generally benign results from JPM and WFC.   As we have mentioned on more than one occasion, it has been a seasonal pattern that banks get off to a strong Q1 stock performance only to give some of that back in Q2.

Also keeping a close eye on the retail sector which had a heck of a day yesterday with the XRT up 2% to see if this morning’s weak March retail sales data will cause a bit of a pause.