MorningWord 5/24/13: When I was a young trader working with and for older traders I used to hear a lot of war stories and get lots of advice. So here is a an example of one that I often think back to.
Back in the late 90s when specialists on the floor of the New York Stock Exchange still held some sway in the price movements of stocks, and stocks still traded in fractions, specialists, on the least bit of stock specific news, would make an opening indication for a stock as wide as they could in an effort to draw in buyers and sellers.
If for instance IBM closed at $200 and after the bell missed earnings and guided lower to the tune of 10%, you would see the specialist next morning indicate the stock $180 bid at $185 (depending on where the stock was trading in the pre-market, but remember this was before the proliferation of electronic exchanges, and pre-market activity was usually done with a large capital provider like a bank) in an effort to see where people cared on the downside. More often than not the stock opened above that dramatic first indication, but the specialist always did his best to have the opening imbalance look as sloppy as possible so he could open it low, buy stock on the print (his job was to provide capital to make a fair and orderly market… ha) and sell his shares higher as shorts or bottom-fishers came in.
One of my mentors at the time used to say watch that opening indication for the disaster dujour. Despite where the stock actually opened, the stock would find its way back to that initial indication level. While specialists hold little clout anymore I often look at gap levels, rebounds and retraces to get a sense for where support and resistance can come in.
Yesterday I had a friend in the business ask me what I thought of selling the CRM May24th weekly (today expiration) 42.5 put at .50 in front of last nights earnings announcement. To be honest, CRM is on the RiskReversal.com banned list as the stock makes little sense to us. I quickly looked at the implied move of about 8% vs the 4 qtr avg move of about 7% and then had a look at the chart. The 15 day chart below shows the stock’s breakout level at $42.50 which also happens to be the 50 and 200 day moving averages, and also happens to be right at the level where the stock gapped down to yesterday on the sloppy open.
Looking at the ytd chart, helps make my point, as yesterday’s low of ~$43 was right after the opening and then the stock popped as buyers came in.
So when my friend said he was mildly bullish, but didn’t want to commit long premium to the trade given the high implied vol heading into the print he wanted to find something to sell with little duration risk. My simple and fairly pedestrian analysis was that was not the strike to sell, almost purely on my memory of the little gap lesson (even though very different than the late 90s, still kind of applicable). Last night, the company beat on their fiscal Q1 but guided down for fiscal Q2 and the stock is trading down about 7.5% in the pre-market at about $42.50 or yesterday’s low. If my friend had executed his put sale, his trade could very well be a winner if the stock closes above $42.50 today, but he would most definitely be sweating it all day and would likely have to make a decision on whether or not the stock will stabilize, or risk getting put the stock. IN the end the risk of capturing 1% of the underling in a day in front of a potentially volatile earnings event with yesterdays opening gap very near “the level” didn’t seem like the right trade, regardless of fundamental view. This one is gonna come down to the wire.
MorningWord 5/23/13: As Enis said in his MacroWrap earlier, “escalator up, elevator down”, not much more that needs to be said on the Nikkei. We have mentioned on more than one occasion in the the last month that the increased volatility in commodities and currencies was likely at some-point to cause an adverse effect in global equities and pull that protected rug out from underneath the rally. No victory laps here, this is not gonna be an easy one and we have been early on the call for a correction.
As I consider the price action of the last 24 hours, it most certainly could be the sort of thing that we look back on in a few months and say, wow that was obvious, but my sense is it won’t be that easy. Tops are a process and in many ways today’s set up could prove to be a bit treacherous for those looking to press the SPX on the short side, right here, right now. After yesterday’s reversal in U.S. equities, I would have liked to have seen a small up opening this morning and get a sense for what sort of muster the “buy the dip” crowd has. But the overnight action in Asia that has spread to Europe, has robbed us of that possibility, and sets up for 2 scenarios the way I see it; 1. a bounce (S&P futures already 7 handles off of the lows) that gets sold and we make a move back towards 1600 which should serve as decent near term support, or 2. they get back to doing what they do, and view any pullback as an opportunity to get long and strong. We have joked among ourselves at RR HQ that buying every 1% dip in the SPX this year (and there haven’t been many) have been the “Buys of the Year”, will it be different this time?
If I was a raging bull (which I am most certainly not) the healthiest thing for the longevity of my portfolio would be an orderly sell off that takes out what looked to be a near parabolic rise in the last month that at yesterday’s highs neared 10% gains from the April 18th lows. So if you are one of those “levels” guys, as stated above then 1590 to 1600 should serve as the first target for support which matches the break-out level, the 50 day moving average and the lover end of the up-trend channel that has been in place since the Nov 2012 lows.
Readers of the site and viewers of Options Action, Fast Money and Talking Numbers on CNBC know that we have our fair share of Single Stock shorts on, Long VIX call spreads and Enis has been a size buyer of U.S. dollars against any cross…..this trade should work ok for us in the near term, but we are most certainly looking to add longs at support or prior break out levels of stories that may start to act independent of the broad market or at least due to sound fundamentals act less bad in the event of a sustained sell off.
Here are a few names we are looking to add long exposure to and the levels:
CSCO at ~$22 the earnings break-out and long term resistance that should now serve as support:
BBRY at ~$12, which is 2013 support and right above the 200 day moving avg, something has to give here, sum of the parts attractive low double digits:
JCP a name that Enis has been all over on the long side and currently looking to re-enter the trade at $17ish, some-where near that 100 day moving avg :
TGT, Enis also likes at $65 or so which matches the breakout level and should serve as long term support right above the 200 day moving avg:
Point here is trying to pick tops is a fool’s errand, we have done our best to avoid all out bearish trades with index options and instead focused on single names where we feel there is a disconnect btwn price action and fundamentals. We have also been fairly adamant that equity vol has been too low and why on more than one occasion suggested that long VIX calls is a better play for a reversal than SPY puts, which could begin to change if we were to see a quick vol spike. So we will continue to play from both sides and will not get married to just one view, but as “The Dude” said (I paraphrase)”this is a very complicated case….lotta ins, lot of outs, lot of what have yous”. Just cause it has been a one way street on the way up doesn’t exactly mean we are gonna go straight down, despite the action in Japan overnight, so the best thing for most market participants is stay nimble but keep your primary thesis intact.
MorningWord 5/22/13: Another day, another record for the SPX. While the price action can be categorized as relatively sideways, it wasn’t a great day to be a big box electronics or video game retailer.
BBY was down 4.3% on what can only be categorized as a disappointing quarter highlighted by an earnings miss and greater than expected decline in gross margins due to the company’s commitment co continue their holiday season policy to price match online competitors.
GME was down 5% as MSFT introduced their new hotly anticipated Xbox One, and there appears to be some uncertainty whether or not the console will play used games without certain coding.
Yesterday’s declines in the aforementioned names stick out, aside from both being consumer-tech focused retailers there are a couple similarities about the stocks. Both stocks were essentially left for dead last year, with many calling for their demise as a result of AMZN’s continued market share-gains based on bricks and mortar retailers inability to compete on price. Despite the secular trend towards web sales, BBY and GME have had some spectacular performance ytd up 46% and 116% respectively as both companies continue to execute on restructurings. My sense is that the stock performance could have more to do with the fact that both stocks trade at about 10x next year’s earnings estimates, both have high short interest (BBY ~10% & GME ~34%), both pay a healthy dividend (BBY ~2.65% & GME ~3%), neither company is over levered, both have a heavy concentration of holders among largest holders (both have about 60% of the shares outstanding owned by the top 10 holders).
Whats even more fascinating in a year that has seen the resurgence of left for dead bricks and mortar electronics retailers is AMZN’s under-performance only up ~7% ytd.
I guess the lesson here is fairly simple, sometimes the moves that we expect least have little to do with fundamentals and a lot to do with technical factors. This has been a running theme in the market for some time. We have made this point on a few occasions of late, most recently about some of the solar names and the move in TSLA. So both BBY & GME came in hard, on heavy volume on fundamental news from 52 week highs, I would say this would not be the sort of price action to ignore if I were long, but who knows how long the current technical trends will last in what appears to be a market that defies all that doubt it?
MorningWord 5/21/13: Investing in equities on a stock by stock basis is not exactly one of the easiest endeavors, thus the proliferation of sector ETFs. Take, for example, the performance of the large cap Technology sector over the last 9 months. Early leaders (IBM, AAPL & AMZN) have become laggards and past laggards (GOOG, MSFT, INTC & CSCO) have become leaders. Stock picking is hard, there is no doubt about it, and trying to figure out a company’s financials, their products, their competitive positioning can be tough enough, but then throw in the animal spirits of a raging bull market and un-quantifiable characteristics like sentiment’s role in short term price action and sometimes it can feel damn near impossible.
On that note, last week a somewhat little-talked about tech stock, NTAP, was brought to the forefront by revelation that activist hedge fund Elliot management has taken a “large stake” in the storage provider and that they are urging the company to return cash to shareholders. The stock rallied nearly 8% on the news, and has since given back more than half of the initial gains.
SO, in this raging bull market that has seen meaningful rotation into cyclical tech with companies with strong balance sheets, OK growth and reasonable valuations… why is it that NTAP has yet to join the party, up only 11% ytd, trailing the Nasdaq that is up nearly 16%? Could it be because they don’t pay a dividend? I would be surprised if that was the only reason but I guess data storage vendors with heavy hardware leanings are just so 2010! In comparison, EMC, RAX & VMW are all down on the year, so on a relative basis NTAP has actually performed quite well, even before the Elliot news.
I wanted to put NTAP on readers radar as they report their fiscal Q4 earnings tonight after the bell, and I am sure their 33% net cash position, coupled with the stocks relative under-performance could be a major line of questioning on their conference call given the recent investor interest.
In sum, there are haves and have nots in any sector, and for some fairly important secular reasons hardware companies are not in vogue at moment, but all you have to do is look at MSFT or INTC and see how out of fashion companies levered to PCs have been of late. I guess my point is simple, in a raging bull market, every dog has its day, especially cash rich dogs.
Stay tuned for our Q4 preview later today.
MorningWord 5/20/13: The rally off of the November 2012, now equaling about 24% in SPX terms has been called many things, but the one most common seems to be the “most hated rally ever”. Hedge funds have underperformed throughout meanwhile, as large, predominately long only capital pools the world over have piled into stocks/sectors that would not normally be the hallmarks of a raging bull market.
In the last month, the SPX is up about 7.5%, while some of the best performing sectors since Nov have under-performed as investors have moved into more cyclical sectors. Since April 19th the XLP (consumer staples) is up less than 3%, the XLU (utilities) is basically flat and the XLV (healthcare) is up ~3.5%. This compares to sectors that had previously caused some bears to fear the rally was tapering back in Feb/March as it appeared that financials and homebuilders had topped out after strong performance out of the gate in 2013. But these 4 very economically sensitive sectors have caught a massive bids, with the XHB (homebuilders) up ~15% since April 19th and the XLF (financials) up ~11%, XLK (technology) up ~10% and XLI (industrials).
In my normal charting a couple names in this rotation theme, caught my eye over the weekend, names that bears had previously pointed to as fallen leadership.
Poster Children of the Cyclical Rotation:
MSFT up 21% since April 19th at 5 yr highs:
GS up 14% since April 19th
TOL up 20% since April 19th:
CMI up ~10% since April 19th:
While these names have done a bit of the heavy lifting during this rotation, after early year strength, it will be important to track their performance to see if they can keep pace as they all appear to be at huge long term resistance.
The breadth of the rally has definitely increased over the past month, an important feather in the bull’s hat. But since most of the cyclical sectors lagged to start the year, there are many names approaching important areas of overhead supply at current prices. I’m watching for breakouts or breakdowns at these pivotal levels to get a sense for the sustainability of the broader market move.