Buzz on the Street: Fed Says No Taper, More Candy
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights, and analysis in real-time on Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, October 28, 2013
It's All Relative, and It's All Relatively Extended
I've written here previously about keeping an eye on the relationship among three indexes: S&P 500 (INDEXSP:.INX), Dow Industrials, (INDEXDJX:.DJI) ,and Nasdaq 100 (INDEXNASDAQ:NDX).
Although similar to each other in many ways, they are distinctive in the type of stocks comprising them.
Those different inputs don't produce such different outputs while markets are trending. But those differences can quickly become glaring when the trend is preparing to reverse.
They're doing it now. Before I explain how, let's understand what makes the indexes relevant to this exercise.
The Dow has 30 components. (It's actually an average, not an index, but that's irrelevant here.) The companies are the most widely followed by analysts, making surprises rare. Their stocks are the most liquid, making them the most widely held by institutions. Dividends help, too. Some of the components may have growth stories working, but consistency is the norm. Managers don't buy Dow stocks to outperform the market -- they generally perform in-line with the broader market because the Dow generally is the broader market.
Contrast that with the NDX. A handful of its components share the broad institutional holding. They and others may be widely followed. But dividends are rare among NDX stocks, while growth stories are the norm. And growth is often volatile. Managers buy NDX stocks to when trying to outperform their peers.
Basically, NDX doesn't attract the safest money. That's the Dow, all the more so when a rally is peaking. NDX outperforms the Dow during rallies. Eventually, they may behave similarly - exceeding prior highs, hesitating at similar resistance, pulling back to similar support - but the outperformance usually ends and the rally resumes.
Then there are times like these…
Notice in the accompanying charts how the Dow and NDX are negotiating probes above their prior highs (circled red). NDX (middle chart) has probed higher, but it is currently trying to probe higher again. Meanwhile the Dow (right chart) has trended upward almost relentlessly.
The prior high wasn't exceeded without there being pushback. Those reactions down are also labeled (circled green). NDX had quite the struggle, while the Dow barely blinked. For comparison, the SPX (left chart) is not behaving so aggressively in either direction.
So, we're starting to see signs of speculative sentiment waning. That hasn't been a sell signal - in fact, the Dow's outperformance tells us the speculation has limited its exposure, but it's still exposed. That's not a sell signal, either.
But it's a start. And when the turn comes, it can come quickly. The turn can end quickly, too, so this can be worked out by a simple corrective pullback. In case that pullback were to develop, then the inverse comparisons will be made to identify its end.
I discussed the indicator in greater detail during this weekend's Saturday Strategy Session. You can watch a replay here.
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RGR Looks Buyable
A 10-minute Sturm, Ruger & Co. (NYSE:RGR) with a 3-day lookback shows a little breakout.
RGR looks buyable for a trade with a minimum projection to a backtest of its 20 DMA or an extension to 67 and Gap window in the more bullish retrace case.
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Bullet Over Broadway
With 45 sessions left in 2013, the Dow is up 19%, the S&P is up 24%, and the NASDAQ (INDEXNASDAQ:.IXIC) is up 31%; how do you spell performance anxiety? N-O-W
Market breadth is balanced, the dollar is marginally higher and commodities and stocks are both mixed. This is considered 'basing' above support (it would be 'churning' under resistance) at S&P 1730 and NDX 3255.
There is chatter that Thursday -- Halloween -- is year-end for mutual funds (and other select funds) and that might reduce the upward thrust (as funds no longer have to defend positions). That remains to be seen but it should be on your radar.
The banks are a bit slinky this morning (it's all relative), as are most of the high-beta plays, with the exception of Google (NASDAQ:GOOG). As they've led the tape higher, we should keep them on our radar, particularly as the day drags on.
As always, I hope this finds you well.
Tuesday, October 29, 2013
Mind the Dollar
Aussie dollar futures (AUD/USD) are breaking below their 20-day moving average, which could be a sign of trouble ahead for commodities. In fact, we are seeing the majors drop across the board -- even the yen is falling. This dollar strength is probably catching a few traders off guard and could be sending a signal for tomorrow's FOMC. The yield on the ten-year has not made a new low in five days; has the no-taper trade bottomed out?
The biggest shock to the system would be to have an opposite reaction from the one we had on September 18. The boat is loaded up on the obvious trade, but to paraphrase Granville: "If it's obvious, it's obviously wrong."
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Santa Brings Coal for Mortgage REITs
I wanted to get this preliminary post out there since the mortgage REITs were under pressure early.
American Capital Agency (NASDAQ:AGNC) reported earnings last night and the entire mortgage REIT sector is getting hit in response.
The bottom line is that given the deleveraging during the quarter and the spread they were able to earn, the optimistic case that the mREITs will be able to bump their dividends higher is not a possibility. So the market is repricing a much lower dividend yield than the mREITs were priced for yesterday. AGNC earned 45c in the quarter after an accelerated rate of realized amortizations, and had to pay out 80c. That's obviously not a sustainable combination.
For example, after repo and hedging costs, AGNC earned 1.37% in net interest (annualized) at quarter end, the most favorable time of the quarter. Their average for the quarter was 1.2%. Leverage was down to 7.2x including TBA agencies, down from 8.5x at the end of 2Q. So in a best case scenario with the current asset mix and leverage, I think they can earn 11.06% on the portfolio. The trust is currently priced for 14.54%. So there will be more dividend cuts in the future.
I do know that mREIT's stopped deleveraging in August, so I suppose that they can get more leveraged as things go forward. Judging by the comments of AGNC's press release, that does not seem to be their strategy as they rolled down to 15-year maturity agency MBS from the 30-year. I'm going to listen to the conference call (starts at 11 a.m. ET) to see what else I can find out. I'll be back with a further detailed post this afternoon.
A Major GDX Bottom in Progress?
The enclosed big picture of the Market Vectors Gold Miners ETF (NYSEARCA:GDX) suggests strongly that the price structure is attempting to carve-out a significant double-bottom low in the 22.00 area.
That said, however, the GDX must climb above 31.35 to confirm the double bottom, and to trigger projections into the 38.00-39.30 target zone.
Given the "up-trend" that has developed in weekly momentum, my suspicion is that the GDX is transcending from a "short the rally" market into a "buy the weakness" market, unless of course, 22.87-22.21 is violated.
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Wednesday, October 30, 2013
Powering Up Facebook Ahead of Earnings
I just took down a small slug of Facebook (NASDAQ:FB) $48.50/$49.50 call spread for $0.51 ahead of earnings tonight.
The reason I want in is that Facebook's down about 9% off the highs on a general cooling off of the mega-super high-beta complex, as well as the Forrester report that called Facebook's ad operations a bunch of garbage.
Meanwhile, LinkedIn (NASDAQ:LNKD), Yelp (NASDAQ:YELP), Twitter (NYSE:TWTR), and Google all reported very strong ad revenues for Q3, including in mobile. Since Facebook doesn't issue guidance, there's reduced risk of the stock selling off on Q4 guidance, the way LinkedIn and Yelp are today.
The reason I don't want to buy common stock is because of gap risk. In the event Facebook somehow misses in the face of rising expectations, the stock's going to get smashed, which means waking up to an unpredictable loss. Check out the chart below, which shows that revenue expectations (source: Bloomberg) for this quarter have gone up quite a bit in recent months..
With this trade, my downside exposure is fixed at $0.51 per lot.
Additionally, I may look at the $49/$50/$51 butterfly expiring this week, which is a low-cost, low-probability, but high-payoff play on Facebook doing basically nothing post-earnings.
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The Fed refrained from tapering monthly asset purchases, saying it will await "more evidence" before going forward with a QE taper. The Fed also saw improvement in the economy even with "fiscal retrenchment."
Added: "Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months."
Removed: comments on "tightening of financial conditions"
Bond prices are moving around some, but Fed Funds futures are still pricing in the Sep/Oct 2015 time frame as the first confirmed rate hike. The dollar is rallying. Our read is that it is a little more hawkish than what was expected.
Read the full statement here. And see a side-by-side comparison from Bloomberg here.
"Stocks are in a bubble."
"No they are not. Stocks are not alarmingly high."
As one who watches social mood closely, it is very interesting to see such open disagreement among rock star investment professionals. Like politicians and economists before them in this environment, we are now seeing open "zero sum - if I win you lose - thinking" among Wall Street titans.
Folks will say this doesn't matter, but confidence requires a consistent and coherent message. Just ask kids of divorcing parents about how confident they feel about the world.
Across politics and the financial community, I am seeing mounting incoherence.
In a world awash in liquidity, it may not matter -- until it does.
Thursday, October 31, 2013
Mission in the Rain
Yesterday we asked if the FOMC would bless the equity melt-up; in the early afternoon, we got our answer.
In the current bizarro environment, where good news is bad (implies tapering) and bad news is good (pushes tapering), the on-the-margin hawkish commentary from the Federal Reserve was viewed as an incremental negative, as some perceived the 'sequence' of tapering could begin a few months prior than previous expectations.
Forget for a moment that economists suggested earlier this week that the Fed would avoid massive losses by never selling mortgage-backed securities from its record $2.84 trillion balance sheet; "Project Rug Sweep" has been the cause célèbre of a rally that drove 92.2% of the S&P higher this year with an average gain of 29.96%. On its face, Sir Isaac Newton got this one wrong; every action does not have an equal an opposite reaction, or so it would seem.
Given the ability of the Fed to control the money supply (or digital credit, as the case may be), the question is begged whether there will be a comeuppance--and if there is, how it will manifest? There are several emerging hot-button issues--the prevailing direction of social mood and increasingly strained foreign relations, among them--but they've been a distant chorus to the price action on the main stage. And as we know all too well, the stock market was designed to be the world's largest thermometer.
I've asked some of the smarter market observers I know to poke holes in this strategy, asking, "If FASB 157 (mark-to-market) never comes back in our lifetime and the Fed holds to maturity, is it 'really' possible that they can sweep all this under the rug?" I wrote a column several months ago likening the Fed policy to the put-writing strategies of high-tech companies in the late 90's; it worked great until it didn't and when it didn't, they simply wrote off their losses and never looked back.
The hard-core skeptics maintain "this" will matter, although there wasn't a uniform view in the timing or catalyst. Some pointed to how confidence in the Fed peaked last July--and as confidence in central banks weaken, "FASB 157 will be the least of the worries." Others noted that "mark-to-imagination" is not sustainable and therefore unrealistic over an extended period; and when underlying values emerge, there will be sticker shock."
Still others point to fatigue in risk assets (after a four-year 166% rally), policy (including "Obamacare," which will disproportionately impact stockholders) and a "tipping point" on the global stage, when globalization flips the switch to isolationism and leaders protect the interests of citizens rather than pander to what they view as a fading imperialist agenda.
There are a lot of moving parts and many competing agendas, particularly with mutual fund year-end today and the calendar year-end dead ahead. While the cast is not yet die, I would offer that IF the bears have a last gasp in them, it will emerge over the next two weeks. It's a tall order but not an impossible one; their mission in the rain is to drive prices below support at S&P 1730 and NDX 3255.
Good luck today.
Chicago PMI - Wow
Below is a chart of Chicago PMI going back to 2000. It has rarely had a higher print.
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During that time, it has NEVER jumped more than 10 points in a month.
I honestly have no clue what to make of it since it seems so different than almost any other data we have been getting.
All I can think is that Chicago is experiencing growth at a record rate of improvement, or something about the government shutdown lead to some strong orders or business flows once the government re-opened. So that seems weird too.
I am left scratching my head, but this morning we wrote about "bad being good" and this almost has to fall under the category of "too good to be true," but in this strange world, it is dragging stocks down, putting my morning analysis in the "right for the wrong reasons" category.
NFP Revisions Foreshadowing End To Hiring Cycle
September payrolls came in at 148k versus expectations of 180k, a negative surprise of 32k jobs. Prior month payrolls were revised up to 193k from 169k, an increase of 24k jobs. At face value, these differentials indicate a wash, but a closer look reveals conflicting signals.
Below in the first chart, the red lines are the Actual (First) NFP releases since 2000. In light blue, the subsequent First Revision for that date. The difference between the two is plotted in dark blue (right axis). For three years, this differential has been weakening. The channel's area below zero is now greater than the area above zero.
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If this trend continues, the probability and magnitude of positive revisions should decline, while the probability and magnitude of negative revisions should increase.
Next, in the second chart, we calculate the NFP Forecast Error Volatility of surveyed economists (blue), constructing an error band (gray). This measures the size of the surveyed economists' recent forecasting error. At a 13-year low, it has never been easier to make an NFP forecast. Historically, comparable low error readings have led to very volatile, poor forecasting regimes.
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Lastly, in the third chart, comparing the Actual (First) NFP release and the Latest Revision (Last Price) at each date, a cyclical pattern also emerges. In the last expansion, peak positive revisions occurred in mid-2005. In this expansion, the peak was in mid-2011. The July 2013 differential in particular (circled in red) stands out – having now been revised to 89k, down significantly from its original value of 162k. This very low reading suggests, similar to late 2006/mid 2007, that payroll numbers and their revisions may continue to deteriorate over the next several months, foreshadowing an end to the current hiring cycle. If historically low forecasting errors begin to rise in tandem, consensus may fall behind and have to chase the data lower, precisely when getting the right call has never been more important.
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[Excerpted from October 22 Economic Report]
Friday, November 1, 2013
Trick or Treat?
"So far this year the headlines have been the 'trick,' while the stock market has been the 'treat!'" . . . A guest on CNBC yesterday,
What a clever twist on words I thought as I heard Maria's guest speak them yesterday afternoon; I wish I would have thought of them! Yet, she was exactly right because the headlines this year would have caused investors to shun stocks, but that would have been the wrong strategy. As portfolio manager Don Hagen, of Day Hagen Asset Management, said at the recent Ned Davis conference, "Overweight statistical probability; underweight emotion." Indeed, emotion in the stock market is the investor's worst enemy. The statistical probability of the year occurred on December 31, 2012 and January 2, 2013 when the equity markets recorded back-to-back 90% Upside Days. A 90% Upside Day is when 90% of total points traded, and 90% of total volume traded, occur on the upside. Such skeins are pretty rare. But when it happened at the beginning of this year, I wrote about it and noted that, "Since 1950, following such back to back 90% Upside Days, the S&P 500 is better by 6.1% one month later 83% of the time, 12.8% higher three months later 100% of the time, and 18.9% higher six months later 100% of the time." While we didn't quite make those returns this year, we certainly came close. To be sure, "Overweight statistical probability; underweight emotion!"
Yesterday was another "trick or treat" session as early morning weakness gave way to a rally attempt (the treat) that fizzled around the 2:30 p.m. daily pivot-point, leaving the senior index down 73 points by the closing bell (the trick). A similar trading pattern can be seen in the daily chart of the S&P 500 (SPX/1756.54), leaving the SPX resting marginally above its 10-day moving average at 1755.60. Yesterday's action was a reflection of the fact that the stock market's internal energy, at least as measured by my indicators, was TOTALLY used up coming into this week. Further, as repeatedly stated in these missives, my timing models suggest the equity markets are again becoming vulnerable to a downside attempt from mid-November into the early December. That does NOT mean I am bearish. Quite the contrary, I think the equity markets are going substantially higher in 2014; it's just that on a trading basis I am cautious, believing the SPX could pull back to 1730 - 1740 and not present any damage to the secular bull market case. To wit, the recent debt ceiling deal clears most roadblocks into year end, this earnings season is again coming in better than expected, the economy is not collapsing, central banks are accommodative, sentiment is not excessive, PE multiples have room to expand, and the world is profoundly underinvested in U.S. equities. Also, yesterday was the end of the month and the end of the fiscal year for many mutual funds and hedge funds.
GLD/GDX Inflection Point
Yesterday, we sent a note on SPDR Gold Trust (NYSEARCA:GLD), that it was poised to turn its weeklies down.
GLD is pulling back right on schedule in keeping with a 60-day, low-to-high-to-high cycle outlined in this space.
GLD made a major low on June 28 and rallied to a pivot high in late August, followed by another rally into October 28, 60 days later.
Now, GLD and GDX are set to turn their respective Weekly Swing Charts down today on trade below last week's lows.
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More than price, it is time that determines the trend. The primary and secondary trends are told by the behavior on the turn ups of the weeklies. This sometimes coincides with obvious price support and resistance.
Last week's low in GLD was 126.79. This morning's pre-market low in GLD is right there. The turn down is occurring as GLD backtests its 20-day moving average and a 50% retrace of the recent rally.
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If GOLD and GDX are bullish, another higher low should be defined soon in terms of both time and price.
If they are bullish, as I suspect, my expectation is that a low could play out as early as this morning.
Beware of Financials
While the S&P 500 posted only a modest decline (-0.28%) in yesterday's session, we continued to see signs of weakness underneath. Financials (NYSEARCA:XLF) in particular remain a primary concern. Their relative strength against the S&P 500 (lower panel of chart below) peaked back in July, failing to confirm the S&P 500 (SPDR S&P 500 ETF Trust (NYSEARCA:SPY)) new highs in September and October. Over the past two weeks, we have seen this relative strength turn sharply lower, and it is now back to early May levels. At the same time, the sector is potentially forming a triple top formation (see top panel of chart below). As weakness in Financials has led all of the major corrections over the past few years, at the very least caution is warranted here until we see some improvement in the sector.
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