Buzz on the Street: The Bulls Cautiously Walk on the Razor's Edge
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Wednesday, May 8, 2013
The lead line in a Marketwatch story this morning on Nouriel Roubini is "Stocks aren’t in bubble territory, but they could be headed for a big crash". The story then goes on to say that a "huge rally in risk assets over the next two years could be setting markets up for a major sell-off."
Yesterday noted bear Jim Rickards tweeted, "To clarify, I called stocks higher since last year, time stamped. Just because it's a bubble, doesn't mean you can't make $."
This morning Barry Ritholtz added (Editor's Note: there is some 'colorful' language contained in this blog post) his two cents with "This indifference is not the sort of thing typically seen at tops."
"As we have been saying since 2009, this continues to the most hated rally in market history. Until that changes, I suspect it has farther to run..."
Bulls and bears alike are now of the view that whatever this market is (and love it or hate it) it is not overloved or overowned, therefore it must still move higher from here.
But I would note that everyone's perception of what THE market peak must feel like is grounded in 2000 and/or 2007. "Now those were peaks!"
The idea that THE peak could somehow sneak up on the market is laughable to market pros today. "Tops feel and act like tops! And this ain't one."
I don't pretend to call tops and bottoms, but the recency bias that I see today is palpable. Because it doesn't yet feel like THE peaks of the recent past, it can't be one today. Therefore the market must keep going higher.
What I know from history is that tops are defined by the moment when everyone believes the market will continue to go higher, no matter the justification/rationalized thinking.
Today the justification - from bulls and bears alike - seems to be that we aren't at a 2000 or 2007 bubble top yet. The market must continue to move higher until it feels like it.
2000 and 2007 were just two of the hundreds of major market peaks over the past 100 years.
At the end of the day, just because it doesn't feel like either one of those may not matter.
Just food for thought.
The auction was weaker as we expected, and the 4.5bps roll seemed a bit excessive even. Directs were also well below average, which I attribute to record high allocations to Treasuries over the prior two weeks.
With the roll into the new issue, we'll be closer to the 1.82%-1.83% area I was looking to buy.
Remember that good auctions tend to culminate bullish moves, the inverse being true for poor auctions.
Eyes of the World
Technical Analysis 101 dictates that the time to buy a breakout -- much like the time to short a breakdown -- is on the retest of that level. That seemingly sets the stage for a re-test of S&P 1600 per the chart below, although the price action remains pristine.
The definition of an investment should never be a trade gone awry; heck, I think that is one of our Ten Trading Commandments. In a perfect world, those are set in stone; in an imperfect world, they are 'glossed over' to prove a point. In the real world, one where all you have is your name and your word, life is imperfect.
While I covered a bunch of my short exposure before my surgery, I didn't punt all of my S&P September puts (I tried to do so late Wednesday but I couldn't connect to my wireless trading platform). It's not the size that matters; it's the principle, and the Trading Gods have again reminded me why discipline must always trump conviction.
Interestingly, that one-off broken position has a green P&L today despite the rally in the markets. That can only mean one thing, an uptick in implied volatility. That, perhaps more than anything else, is the most curious thing on today's screen.
Yesterday we noted the slippage in gold while offering, "commodity volatility typically precedes equity movement." Today, the yellow metal has recaptured those gains and then some, and I would be remiss if I didn't note the price action in my persistent battle to overcome the 12 Cognitive Biases that Endanger Investors.
Before I headed into HSS, I recorded a web-cast of what was to be my presentation at The Social Mood Conference in Atlanta. We'll be publishing that shortly in Minyanville and I, for one, find that entire dynamic fascinating.
Thanks and as always, I hope this finds you well!
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Thursday, May 9, 2013
This week/next week shape up as very pivotal in my work.
An idealized target of 1639 to 1641 shapes up as 1639 squares today/tomorrow and there is a measured move to 1641.
Checking the Square of 9 Wheel, I noticed that one full rev down from 1641 gives 1483.
This proves the geometry because 1483 ties to the 1485 February low which was NINETY DEGREES in time from last February's low.
So here we are approaching 180 degrees in time from the November low and 360 degrees up in price from the November low.
At the same time, mid-May is the anniversary of the birth of the NYSE.
Before you give short shrift to anniversary dates, it is worth considering that the pre-crash pivot high in 2008 occurred around this anniversary. Ditto the high in 2007 occurring on the anniversary of the 2002 low and the test failure high at the end of August 2000 rhyming with the September 3, 1929 high.
Understanding the Apache Announcement
I have long loved Apache (NYSE:APA) and their management. They are by far, one of the most efficient managers of their capital structure in all of Oil Exploration and Production. They buy distressed assets on the cheap when other companies are struggling. You could almost say they are the Warren Buffet of E&P. When I hear announcements like today, my ears perk up. Today they announced a $4 Billion asset sale, of which the proceeds will be used to reduce debt and buy back shares. This is good for the company in the long-term as it will make the balance sheet more attractive, reduce lagging assets and boost Return on Equity that has struggled at a measly 6-8% the last several years. It also allows them to keep credit lines free for additional asset purchases should prices fall and be positioned to issue additional equity if it is necessary.
However, from an industry perspective this is concerning. This eerily reminds me of Apollo’s (NYSE:APO) recent announcement where Leon Black said “We’re selling everything that is not nailed down.” While I believe that Apache is doing the right thing here, I am concerned with what it means for their outlook for oil prices. From a long-term perspective, this makes APA an attractive stock as I believe it will be much higher 3-5 years out. Short term, the stock is extended, oil prices are extended and it looks like they are preparing for lower prices. In the very near term, it looks like more of short to me with the overbought nature via RSI and outside the upper Bollinger band, as well as the potential for rejection at the 200 day moving average from underneath. I may take a quick short here, but want to see full rejection at the 200 day. The target would be the 50 day moving average at around 75-ish.
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Utilities Get Sucker Punched
The deflation pulse has most benefited dividend sectors the most, particularly utilities, consumer staples, and health care. I noted in my latest Lead-Lag Report that sharp cyclical rotation appears to be underway, with utilities as of late taking the brunt of the selling. Valuation are stretched in the sectors across the board, and recent weakness is indicative of major repricing beneath the market's surface.
With the Bank of Korea, Reserve Bank of India, Reserve Bank of Australia, and the European Central Bank all cutting rates, bets do appear to be rising that inflation expectations could rise from depressed levels, in turn lessening the appeal of low growth sectors. It is possible that a V-like move occurs in defensive trades given the sharpness of the decline, but this is likely no longer an area to make an aggressive bet on in the near-term.
Friday, May 10, 2013
Bernanke's Speech, Why It's Important
So there's been a lot of chatter back and forth about the significance of Bernanke mentioning the concern over asset bubbles. This isn't the first time that Fed governors have mentioned the reach for yield or bubbles. Back in February the first to lead into was board member Stein, followed by Williams and Yellen. It's important because it's the first time Bernanke has mentioned it; usually the rest of the board members/governors will "prep the market" first. It was also within the minutes from the last FOMC meeting if I remember correctly. So it's gotten to the point where the search for stability has led to instability.
Yellen and Stein mentioned things like farm prices, REITs, and so forth. In Bernanke's questions from Chuckie Evans, (yep you read it right!) he mentions things like covenant-light HY bonds, which coincides with the abrupt increase in issuance of PIK HY bonds where you get more bonds as coupon instead of interest. Why they wouldn't pay interest in this kind of environment is beyond me, but if people will accept it, why not?
Anyway, back to losing money in my TLT position, a good example of "don't trade just to trade."
Signs of the Times?
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Insofar as I'm trading less -- which is prudent given my recovery process and the elements involved -- I'm layering into some September SPY (NYSEARCA:SPY) puts with a stop above yesterday's high at S&P 1635.
Bernanke's speech, the price action in gold -- and yes, defined risk, which is like finding a long lost friend -- is my reasoning, if I were to share it out loud. S&P 1600 feels like an intuitive 'first stop' as far as these things go.
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