MorningWord: 3/5/12

by Dan March 5, 2012 9:15 am • Commentary

MorningWord: 3/5/12:  The real story last week was the divergence between large and small cap stocks, the Russell 2000 closed down about 3%, while the SPX gained about 30bps.  Chart below displays this divergence fairly clearly while also shows the Russell about to re-test a key support level from last spring/summer.

Russell 200 vs SPX 1 yr chart from Bloomberg LP

With the S&P futures down a tad this morning it will be interesting to watch how long this divergence can last and if it is just a head-fake or if large cap stocks will follow suit.  What makes this situation more compelling this week is that we have a monster event where expectations have been mounting for AAPL heading into the March 7th iPad3 launch.  Make no mistake bout it, this is not a “Stock Specific” event, AAPL’s post event reaction is likely to have large implications  for the Broad market as the stock makes up about 4% of the SPX and almost 12% of the Nasdaq Comp. Blogs this morning are showing what is meant to be the casing for the iPad3 and speculates that we will likely see minor improvements to the iPad2 (read here), if this is true, with the stock up 28% since reporting earnings in late January (and up  34.5% ytd) I think AAPL investors should be braced for a re-tracement of a portion of the recent move.

China, China, China

The big news overnight is that China is officially downgrading its target for growth to the lowest levels seen since 2004.  Premier Wen stated in a speech overnight that the 8% plus growth targeted/achieved in each of the last 8 years is now likely to be more like 7.5%.  While this affirms many fears of a hard landing  after China’s torrid growth period of the last decade, world equity markets for the moment don’t seem too concerned as the DAX is only down 35bps as I write (1% off of the morning lows) and our futures are down about 30bps.

This may sound like a bit of an understatement, but sentiment towards equities seems a bit overly positive at the moment, especially when you consider how far we have come since October and the year to date rally that has not yielded a down day of more than 57bps.  If this growth assessment in China came in Sept or Oct equity markets would have been down 3-5% on massive volume…..but now we will probably open lower and attempt to rally and then the financial press will explain it away as the markets are anticipating strong Jobs data out of the U.S. at the end of the week.  This just spells complacency to me, and it is not that sort of environment I can get behind.   Trust me, I want to buy stocks but not after a  13.5% rally in a straight line since Dec 20th, without a single pull back of more than 1%.

As far as China growth is concerned keep and eye on names like CAT ( I am long an April Put Spread), commodity related names like FCX and generally the XLB (materials) and the XLE (energy), if weakness starts to build in these sectors it could be the push that large caps need to catch up with small caps in the near term.

So I continue to leg into shorts and will look to pounce when it becomes apparent we are due for a turn (and we are close).  But I am building of list of names to buy on the sell off.


MorningWord: 3/2/12:  U.S. equities continue their resilient tone, closing yesterday at new 52 highs after shaking off the previous day’s late afternoon jitters.  Gold rebounded slightly, as crude rallied a touch along with the U.S. dollar.   The biggest take away for me from equities yesterday was that for the first time in a while it didn’t seem like AAPL was the “tail wagging the dog”.  U.S. banks were driving train for the first time in weeks.  Goldman’s more than 5% surge yesterday on big volume, breaking out of a well defined month long base was nothing short of impressive and when you look at the chart below, it appears that $130 is now a massive target, even with the stock up about 34% ytd. [private]

[caption id="attachment_9255" align="aligncenter" width="300" caption="1 YR"][/caption]


On the next pullback in the banks, I am strongly considering long XLF (or some individual names) and short XLK (also some individual names) as I believe many tech stocks that I see trading near mult-year highs with increasingly rich valuations brought on by managed earnings rather than real revenue growth, vs banks stocks that are definitely seeing similar earnings characteristics except their stocks remain well off their 52 week highs and seemingly trade at near rock-bottom valuations.  Now I may be a little late to this party, and I am not jumping in at current levels, but the bases that were just broken by the premier names in the group, GS and JPM are nothing short of impressive……

Even with GS up 34% ytd there is a clear difference btwn it and AAPL also up 34% ytd, one has made a series of bases, gathered some steam and then moved higher, while the latter has just gone parabolic.  I obviously understand that there are few other comparisons that you can make btwn the companies and the stocks, but they are both market leaders (even-though AAPL has gained almost 3x of GS’s market cap in the last 3 months!), but price action is price action, and as I trader I have to make relatively educated decisions as to where to place my chips and when.  So gun to my head, I Buy GS over AAPL here and actually think that a pairs trade could be an interesting combination as it realtes to entry points on a dollar for dollar basis, But as I already have short exposure in AAPL, I will wait for that to come in and GS to come in and just buy GS when I cover some AAPL.

AS for AAPL it’s torrid gains seem to be abating a bit and while it kept up with the SPX yesterday it did not out-perform as it has over the last 2 weeks.  In both of the last 2 days the stock gapped up to new highs and at one point dropped at least 1.7%……this is obviously an indication that some holders are looking to take some profits and at all time highs, and those banks who are relied apon to make markets in names like AAPL are probably less likely to make tight markets, and less likely to hold that risk.  So for instance if AAPL Is trading at $545 and a large holder goes to a big bank and asks, “where can I sell 1million shares of AAPL?” the bank will likely say “I will “stop” you down at $543″ and then will get to work offering it to their other clients but ultimately they owe the seller a price of $543 or better.  SO if there are not takers (other clients of the bank) they have to make a decision about how much AAPL that trader is willing to hold if the price drops below the stop….I have to assume at these levels and the potential for downside volatility that most sell side market making desks are not willing to take much risk owning to much AAPL at these levels…..and that is one good reason why u can see a peak to trough drawdown in a short period of time like we saw of 2% on Wednesday and 1.7% yesterday.

[caption id="attachment_9256" align="aligncenter" width="300" caption="2 day intra-day chart of AAPL from Bloomberg LP"][/caption]


Now if a few guys decide to head to the door at the same time in a thinly traded name like AAPL that can move a few bucks at a clip then we get the sort of price action we got Feb 15th and 16th where the stock sold off 7.5% from an all time high…..this will happen again and soon, it is not a matter of it will, just a matter of when in my humble opinion.  Now if it doesn’t happen prior to the March 7th iPad3 launch even it will most likely happen the minute Tim Cook steps off the stage.

[caption id="attachment_9257" align="aligncenter" width="300" caption="AAPL Feb15th-16th chart from Bloomberg LP"][/caption]



MorningWord: 3/1/12:  Well people, we almost had it yesterday…..IT being a real sell off.  Yesterday’s action in Gold down almost 5.5% was its worst day since late September and almost unerved the entire market.  The SPX closed 90bps off of the morning highs, near the lows of the day, and we actually started to feel a little panicky.  Key word being little.

Waking up this morning though, all is well in the world again, European equities are up across the board, with the DAX near the highs of the day up close to 1%, Euro down a tad, Gold bouncing a bit, crude practically unchanged and our futures rebounding 30bps.  

I hate to sound so myopic, but at this point the fate of the rally will lie in the hands of the iPad3.  No crap, if AAPL can hold at current levels, or continues to rally into next week’s March 7th launch event than the market likely to hold too……Yesterday’s late day volatility in AAPL should have put the fear of you know who into new longs, because it feels like a reversal similar to what we saw on Feb 15 is coming to a theater near you.

[caption id="attachment_9217" align="aligncenter" width="300" caption="Intra-day Feb 29th, 2012 AAPL chart from Bloomberg LP"][/caption]


The reversal will either come after a gap up to new highs or come after the iPad3 launch if the product is withing expectations…….[full disclosure I purchased close to $3k worth of iStuff yesterday at AAPL for a new RiskReversal team member, the 3 third Iphone4s and the 4th Macbook that I have bought  since last summer]  So I am either the dumbest guy on the planet, actively losing money shorting the stock and buying their products at the same time, or I am just early to the trade…..I vote the latter.  I am trying to keep some powder dry, I am still long the March 480/460/440 Put Fly that at this point will likely be a total loss, but I will continue to try to buy weekly puts in the effort to leg into put spreads to be there for the turn.   This action is the dumbest thing I might have ever see since starting trading equities in 1997, and trust me I have seen a lot of dumb things…….My opinion has little to do with valuation of growth expectations, I fully concede this is the best company in the world, which makes the best products in the world, but the sentiment in the stock is off the charts and can not last.

SO when AAPL reverses so does the market it is that simple.  It is shocking to me that not one of the 50 sheep that we call wall street analysts who has a BUY on the stock has the balls to downgrade on purely sentiment, on shear history, on the fact that we all must know that a rally like this is unsustainable…..on a morning where AAPL co-founder Steve Wozniak in the dumbest of all tone’s suggest the stock could go to $100, yet he concedes he know’s nothing of stocks or money.

MorningWord: 2/29/12: Doug Kass kind of nailed it on Fast Money a couple weeks back, “We are seeing a market that is far too focused on a few names – most importantly Apple – it’s an NBA market – nothing but Apple.    The SPX was up 34 bps yesterday while AAPL was up 1.84% and I think it is safe to say without AAPL’s out-performance and signaling the all clear for other large cap tech names like MSFT up 1.66% on the day and GOOG up 1.49% on the day that there is a good chance the broad market would have been down.   But the financial press loves round numbers and AAPL closing the day a billion shy of $500b in market cap and the Dow Jones closing above 13k for the first time since mid 2008 was like Christmas come early for those charged with telling us why the markets did what they did.

You guys know where I stand on this, I presume that you are not a frequent reader of this space because you are looking for the conventional consensus view, you won’t find that here.  I keep getting questions from friends, colleagues, readers, oh and perfect strangers whether I am just swimming up stream?? Well of course I am for now and the truth is I would be an absolute monkey if I just threw in the towel and reversed course.  Throughout my career I have never nailed a top (or a bottom for that matter) within 1% , it’s almost impossible and if one did it would likely have to do more with luck then skill.  The point here is that I have always been early and always will, and as a rule I tend to be contrairian, so I won’t be part of the herd.  Here is the thing, I don’t run a hedge fund or mutual fund, I don’t have a benchmark, like a lot of you, I just have my wife or husband looking over the monthly pnl reports!  But the name of the game is capital preservation, and as I have said here for most of the year, when wrong on direction, you need to be even more mindful of sizing… positions have become smaller and smaller so no one wrong bet puts me on the sidelines for a bit……and when the time is right, when most of the inputs that you use to inform your trading/investing decisions signal to pounce, then you do, with defined risk…….this is what I am in business to do is look for the most cost/risk effective ways to make bets in the market, I am not here to sell some BS long only mutual fund that after fees will likely lag its benchmark, or try to sell some hedge fund that promises great riches in a good markets and “less bad” returns in bad markets.   So if you want to hear the bull case pounded on an hourly basis, just turn the tv on, or read most financial press, and this wouldn’t be the site for u unless u want a little bit of skepticism to water down all the fluff out there.

So I think the important thing is to recognize the ideas that we speak about on the site are not meant to be an investment portfolio.  I look for situations where the market under or over-appreciates a situation and look for a defined risk way to play, or look to reduce exiting risk.  Think of RiskReversal as on add on to your existing reading that is not likely to follow the herd. There I got that off my chest.  IN the next couple weeks we will be introducing a new full time writer to the site who will hopefully be able to balance a lot of my stubbornness, stay tuned.

As for the “NBA market” I think at the multi year highs AAPL now serves as a bigger impediment than a catalyst for higher highs.  Next week (march 7th) the company will hold their iPad3 event, and if the product launch is disappointing I can only imagine this stock re-tests $500 quickly and possibly back the lows made in the mid $480s from that reversal mid month.  This is the most crowded to trade the planet has ever seen, and trust me we have seen this movie before, I can’t tell you when it is going to end but I sure Know How It Will.  Just remember people, when you start hearing daily that it is “different this time” it may be time to “Think Different”.


MorningWord: 2/28/12:  Yesterday’s reversal was just downright nasty if you were short and looking to finally press a move that appeared to be coinciding with a “risk off” opening.  Crude, Gold, Euro, equities the world over were all down, with bonds up and the VIX up 10%……… it appeared for the first time all year we would have a little sell off reminiscent of summer/fall 2011.  The combination of a New Home Sales number that was better than expected and the German Parliaments vote in favor of funding the 2nd Greek Bailout after the European close and BAM, the lows were in……the SPX closed at new 52 week highs, while the DAX closed almost 1.5% off of it’s lows.  Equities clearly have a bid to them as they approach levels not seen since the pre 2008 financial crisis, and it appears that it will take a bit more than some tough talk from the G-20 to get equities down and keep them down.  This morning our futures and European equity markets have reversed on the one two punch of the worst Durable Goods Orders print in almost 3 yrs, coupled with weaker than expected housing data from Case Schiller.  Our futures are down about 50 bps from earlier highs while the DAX is down about 1% from the morning highs.

Yesterday I posted on the IWM appearing at least on the open to be losing a bit of momentum relative to large cap stocks (read here) and breaking below its 20 day moving average.  This was  massive head fake and similar to that of Dec 19th, a date in which it made a similar move below the short term momentum indicator, and since then the index has been up a little more than 24% (not exactly proving the point).  I am going to keep a close eye on momentum, breadth and volume as we approach multi year highs, with out a single pullback this year of more than 57 bps, something has to give and soon, the whole rally feels a bit bubbly to me.  

Also keeping an eye on the rate of change of economic data such as this mornings mentioned above… the later part of Q4 and into Q1 the economic data in the US clearly became less bad… we head into the meat of 2012, as many economists are hoping for 3% plus GDP, things will need to pick up a bit and the data out of Europe and China’s will need to stabilize a bit to correctly signal that a full blown economic recovery is under way.  Obviously I feel that the jury is still out on this, and I worry that a soft spot in economic data similar to what we saw last Spring could be the series of events that derails this market rally.

So I continue to build a list of shorts where I think a lot of good news is in the stocks, MSFT, AAPL, CAT, DELL, INTC and BAC and some potential longs that I would happy to buy on pullbacks JPM (36), GS (100ish)  AAPL (450), NKE (95ish), BAC (6.50).  We are going to start to formalize a “Hit List” and we are working on ways to better articulate our thinking on these levels and the catalysts we see ahead for individual names……stay tuned.


MorningWord: 2/27/12:  World equity markets took a bit of a pause overnight as most of Asia was down modestly (Shanghai comp was the outlier up 30bps) and Europe is down across the board, with the DAX the weakest down ~1.2%.   Europe back in focus as German Parliament votes today on Greek Bailout contribution and over the weekend the G-20 suggested to Euro leaders they were not at the moment willing to increase funding to the IMF’s bailout fund.  I guess this is just more of the same rhetoric that we have become accustomed to as it relates to the financial crisis across the Atlantic, but the timing of any uncertainty heading into Greece’s expected debt payments next month could cause some volatility as U.S. and European equity markets teeter near 10 to 12 month highs, all but discounting positive outcomes in the near term.

$100 oil has been getting a lot of attention over the last couple weeks, specifically what it means for global growth at a time that Europe seems poised to enter a recessionary environment on the heals of austerity, and there is a raging debate over what China’s growth slowing from 8.9% in Q4 to possibly 8.3% in Q1 2012 at a time when the U.S. might be very challenged to see 3% gdp growth for sometime.  [private]

New Home Sales will be reported today at 10am, at some point I think it will be safe to say that the XHB (S&P Home-builders etf) will have discounted the bottom in housing, up almost 61% from the intra-day Oct 4th, 2011 low.  On a longer term basis when you back the chart out to the 2008 highs u see that $20 is a fairly significant resistance level and the near term enthusiasm could be setting up for a bit of a disappointment.

[caption id="attachment_9078" align="aligncenter" width="300" caption="4 YR XHB chart from Bloomberg LP"][/caption]


On a shorter term basis, I find it interesting that as the SPX continues to make new 7 month highs, the XHB topped out a couple weeks ago and has made a series of lower highs and lower lows…..This is worth keeping an eye on, sectors that showed relative strength early in the rally that now appear to be a bit tired.

[caption id="attachment_9079" align="aligncenter" width="300" caption="2 Month XHB vs SPX from Bloomberg lp"][/caption]


Obviously I remain cautious up here, and will continue to look for cheap vol to consider stock replacement strategies or protective structures.  Out futures are only down 50 bps as I write and this will be a big test today to see if we do our usual rally after the European close, banks, large cap tech and material/commodity related names will be the tell today…….


MorningWord: 2/24/12:  This market just won’t stay down, kind of reminds me of the end of ROCKY I where Apollo Creed is just battering a bloodied and defiant Italian Stallion and he just won’t stay down, even against Apollo’s urging and disbelief.   The SPX started out yesterday’s session in the red on the heals of weakness in Europe, appearing that it would test the 1350 level only to reverse course and close near the highs of the day and just a few points from last week’s intra-day 7 month high.

There are definitively a handful of odd things going on as it relates to the macro picture, crude oil continues on it’s run away breakout making 10 month highs, as the VIX closed at a new 7 month low.  Something has to give here, with the SPX around 1360, Oil at $108 and VIX sub 17 , this will likely cause some interesting action in the near future, but the gazillion dollar question is what does that mean for equities?  If crude marches higher, equities are likely to pullback and the VIX will likely go higher…..yes I used a lot of “liklies”.  But I think this is an interesting relationship to keep and eye on.

[caption id="attachment_9052" align="aligncenter" width="300" caption="1 YR SPX vs VIX vs Crude Oil from Bloomberg lp"][/caption]


On the trading front:  I use the expression ” I am Fading” this move or that event to signify selling the strength, and taking the other side of the herd….in this market this is clearly not working…..I get it and while I will always continue to try to tweak my trading approach, I am not entirely sure that at this stage of the rally it would be appropriate to pull the plug on that strategy.  What I can do in the meantime, and as I have been doing over the last few weeks is to adjust my sizing of positions and trade a bit less often in a attempt to shy away from the lower conviction ideas.

I think about it a little like this, while I am on a good trading run and have a healthy risk budget (risk budget = period to date profits) I will size my trades at 1-3% of my speculative portion of my trading book (the portion dedicated to options trading which i have routinely stated should not be a ton more than 10-15% of your entire book) than while in a bad trading period I will size my trades at about 1%.   This in my opinion is the only way to stay in the game.