Is it just me, or over the last month has there been a little bubble among the financial press and punditry in calling the equity markets a bubble? Personally I don’t find the exercise very useful, and as my friend Josh Brown, who writes The Reformed Broker Blog said in his Hot Links post this morning, “The fact that Wall Street guys are still passing around Pessimism Porn charts says we’re not quite in a bubble yet (here).” Enough said.
While I am more than skeptical as to the real reasons for the ytd gains in U.S. equities, I do not believe that the current investment environment reminds me too much of the days leading up the the dot com bubble burst in early 2000 or the sub-prime collapse in 2008. That being said the rage with certain sectors of the market like Web 2.0/Social Media, Solar, 3D printing and TSLA have all the makings of bubblicious behavior, but for the most part I think it is safe to say that the irrational exuberance is fairly contained within about 50-100 stocks in a market of thousands.
The price action today in some of the social media names is pretty fascinating as the SPX is poised to close again at an all time high. Stocks like Z and YELP (that we have bearish positions in here and here) act downright horrible down about 3.5% and sitting on massive support levels. Some market participants would suggest that the ability for the broad market to bifurcate from these speculative stocks is not only healthy, but it is bullish for the next leg of the rally. I can’t argue too much with that, my one fear is that if we see a total collapse by the prior momentum leaders than we could possibly see a snowballing affect that could incorporate other sectors and lead to a nasty little correction.
One stock that caught my eye today was Pandora (P). The company issued results last night that were generally inline, but with some weak forward guidance. The stock opened up this morning more than 4%, and now with less than an hour to go is down 2% on the day. The stock is up 215% on the year, and up 25% since AAPL released their new iOS7 with iRadio (the supposed Pandora Killer). This is a story I just don’t get, great product, first mover advantage, solid technology, but challenged revenue model in my opinion when you consider the deep pockets of their competitors.
The stock has remained bid despite the declines of its web 2.0 brethren for one reason alone, iRadio sucks. That will change. The company with a $5.5 billion market cap is too big to be acquired. These are all long term issues and not really relevant right now, but in the near term though I want to make a defined risk bet that Pandora will join the slide that many of its peers are in. With earnings out of the way, Implied Volatility has come in hard, nearing the lows of the year:
While I wish I got to this earlier in the day, I like the idea of pressing the weakness from today’s highs and look to play for a re-test of the $25 level:
MY TRADE: I am gonna keep this simple, with IV down a ton today, and vertical spreads not that attractive, I am going to buy a put outright and look to spread on a break towards $25.
TRADE: P ($29) Bought Dec 29 Put for $1.60
Break-Even on Dec Expiration:
Profits: below 27.40
Losses: btwn 27.40 and 29 lose up to 1.60, above 29 lose full 1.60