For those that missed our Webinar on AAPL’s earnings here’s a link to the recorded version: https://attendee.gotowebinar.com/recording/4615196009414955008
MorningWord 4/23/13: The SPX continues to thumb its nose at the rest of the investment world. Last night the Shanghai Composite had its fourth worst day of the year, closing down 2.57%, after weaker than expected manufacturing data (flash PMI) came in worse than expected, once again sparking fears that a stalling economic recovery in China would have reverberations across the global economy. I have heard my share of de-coupling theories, almost every which way, from Developed nations to EM and back again, btwn Europe and the U.S. and back again, but at the end of the day, when the economic shit hits the fan, the notion of de-coupling rarely holds up.
Looking at the 5 year chart of the Shanghai Comp, I am hard pressed to think that at some point, without meaningful improvement to economic growth, the Index will once again be flirting with multi year lows.
After the Asian markets close, and prior to Eurozone manufacturing data that came out early this morning, (showing the 15 straight month of contraction), the DAX, Europe’s largest equity index was flirting with 5 month lows. Even with this mornings bounce, the DAX sits flat on the year, massively under-performing the SPX up almost 10% ytd. While the DAX has certainly performed much better than that of Shanghai, the technical set up looks equally precarious in my opinion despite having very different vantage points. The index has broken the uptrend that has been in palce since the June 2012 lows, and now sits on key near term support.
SO where am I going with this little “charting the world” exercise? The U.S. equity markets seem immune to bad news around the world as our Fed prints, 10yr yield sits below 2%, corporate earnings are stable, and we remain a “flight to quality”. Chinese equities, and that of other EM nations like Brazil (Bovespa down nearly 11% ytd) reflect the increasingly downbeat recovery, while Germany and other perceived strong European nation’s may appear to be showing signs of stress from such a prolonged period of weakness. How can the SPX that sits less than 2% from all time highs stand alone?
Yesterday in this space, I suggested that 1575 could be back in the cards this week as the SPX bounced off of the low end of its uptrend from the Nov lows, and given the bounce in the S&P futures again this morning on the heels of European equity strength, this could happen sooner than later, with a possible re-test of the previous highs.
We are obviously itching to “short em” but trying to respect the technicals and the obvious favor of U.S. equities, but there continues to be some relative weakness in smaller cap issues like in the Russell 200o yesterday, where the IWM, showed some very early under-performance on yesterday’s morning sell off.
The Russel’s lack of “bounce” in my mind makes it the “go to” short across the broader U.S. equity indices with a target back near unchanged levels for the year near its 200 day moving average. (Full disclosure, since I closed my Nasdaq short 2 weeks ago, and my SPY Apr Put Fly last Thursday, the IWM remains my only index etf short). The IWM is at a crucial technical spot in my opinion, and a close below $90 in the days to come could be just the catalyst for broader market weakness.
So in sum, the price action in EM, particularly China, weakening technical picture in Germany and under-performance of small caps in the U.S. at time where realized volatility is picking up, suggests to me that we may not have a whole heck of lot more in the near term for the ytd rally (maybe one last test of 1600). The emerging picture from earnings so far is that things are not great, but wait for the second half it is gonna be a lot better. I think the SPX up 10% ytd discounts that here, and continued weak readings in our own data (expectations have been steadily rising for Q1 GDP on Friday, not to mention the April jobs report on May 3rd) could be the catalyst for a potential summer swoon (or at least 5-10% from current levels).
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MorningWord 4/22/13: After first being dictated by wild swings in commodity prices, last week’s price action in the SPX was dominated by U. S. corporate earnings, as it should be during earnings season. At one point on Thursday, the SPX sat almost 4% below the all time high made just one week before, but as expected staged a little bit of a comeback placing the index down just 2.5% from said highs by Friday’s close.
If you are a bear and last week’s volatility got you a little geeked up as we head into the meat of earnings season this week, and a seasonal period that has been particularly volatile over the last 3 years (May-Aug) the chart below of the SPX bouncing off of the bottom end of it’s trend channel dating back to the Nov 2012 lows should make you a tad nervous about pressing the short at this exact moment, 1575 could be in the cards at some point this week..
It’s a tough call at this point, and it’s almost a bit early to get a great read on earnings visibility with less than 40% of S&P 500 companies reported Q1 results yet. While bulls can offer up a GOOG or a CMG for every IBM or BAC, anecdotally, it feels like there have been more high profile disappointments than wholesale beats. My sense is that increased single stock volatility around earnings maybe a precursor to high volatility investors digest U.S. corporate earnings for the next couple weeks and then shift their sights back towards macro headwinds.
The chart below of the SPX vs the VIX over the last 3 years is interesting to visualize how and when the 2 have converged. In all three instances the increased volatility, which led to declines in the SPX of at least 10% all occurred in Q2 and Q3. As the SPX has marched higher during this period it makes sense that these levels of convergence will be higher, but the corresponding moves that will bring these “seasonal” star crossed lovers back together, if they ever do will bit a tad more violent from current levels. Again nothing scientific here, but this little venus fly trap looking chart does not look like the sort of thing you want to get caught in when it shuts.
As Enis detailed in Wednesday’s MacroWrap, when 10 day Realized Vol catches up with that of 30 Implied Vol in the SPX, this has been an attractive time to own protection so to speak:
Realized volatility is rapidly picking up across the market, but implied volatility has not caught up yet. Here is the chart of 30 day IV (blue) vs. 10 day RV (black) in the SPX index:
10 day realized vol in SPX (black) vs. 30 day implied vol, Courtesy of Bloomberg
I’ve circled in red each instance in the past year where 10 day realized volatility jumped above 15 (which is not even that high – that measure was above 15 for most of 2011, for example). Now compare where the 30 day implied volatility (blue line) was at each of those circled instances. In each instance, it rose to at least 15 as well, as realized volatility caused option buyers to price in higher future volatility.
So I guess my main takeaway here is that while we continue to be extended, the re-tracements continue to be shallow at a period where implied vol is still relatively low, despite realized volatility picking up a bit. This is not the normal fear mongering piece, more just an observation that while these relationships can continue to diverge, they can only do so for so long. In the last 3 trading days we have seen a few high profile earnings and guidance disappointments, most recently, CAT’s this morning, a cooling in earnings expectations for the balance of the 2013, coupled with a potential miss to Q1 GDP (to be reported April 26) could cause any strength early this week to retest the low end of the uptrend.