Buzz on the Street: QE for Dinner, an Apple for Dessert
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. Below are some excerpts from this week's Buzz. Click here for a 14 day free trial.
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Monday, December 10, 2012
More On That US Dollar Dandruff
After making new highs in July, the US Dollar Index (NYSE:DXY) retraced roughly 50 percent of its run from the 2011 lows. This key Fibonacci retrace level, coupled with lateral pivot support provided fuel for another rally attempt, one which backtested the broken uptrend line in November, all the while managing to carve out a right shoulder of a bearish Head and Shoulders formation.
This formation will bear even more significance if the index moves back to the neckline around 78.50 – 79.00. And if this happens, I would suspect the index will break down. A break down would target 73.00 – 74.00. However, there is also a chance that the index rallies and revisits resistance at the shoulder line around 81.50. A move above this level would signal that the Dollar is ready to retest this year's highs.
Either way, the technical support and resistance lines are beginning to narrow. And this is usually a pretty good sign that a binary outcome is forthcoming; possibly a news driven event? Note that any large move in the US Dollar Index will have wide ranging effects on global equities and commodities. See chart below.
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The market got pretty used to seeing Apple (Nasdaq:AAPL) lead the market, so I just wanted to post a chart showing a comparison with the S&P 500. (Apple is blue, SPX is the multicolored line)
This divergence is pretty ugly.
Far too many folks out there are focused on Apple's fundamentals, which don't really matter all that much right now. Yes, Apple has a lot of great things going for it products-wise, but it's stuff everyone knows. You'd have to go to the far reaches of the jungle to find people that don't know about how well the iPhone 5/iPad Mini are doing.
To me, the weakness is all about market mechanics -- pre-Cliff profit-taking and a lack of new marginal buyers for the stock.
However, remember one thing: if Apple's dominance does break down and it sees a serious slowdown in growth, don't count on the balance sheet and 'cheap' valuation as some kind of floor in the event that a bunch of people simultaneously decide to hit the exits.
I say that as a person with 20%+ my portfolio in Apple (was great earlier in the year, now, not so much...), because I don't want to be left holding the bag if things do get really bad. All empires fail. It's not a question of if, it's when.
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Thought I'd switch it up this time around with some end of day thoughts on markets. While the S&P 500 (NYSE:SPY) essentially closed flat, by all metrics this was a risk-on day. Emerging markets and small-caps, which are cyclical and more sensitive to growth expectations, rallied nicely and outperformed large-cap multinationals. Many have tweeted to me about the strength in bonds as a bad sign, but the fact that Junk Debt (NYSE:JNK) performed well suggests that the yield drop may be more about Fed expectations than about fear. More and more it feels like the market is winding for a big move higher which could result in a compressed surge in the very near-term. Keep watching cyclicals here - leadership means money is getting more and more comfortable with taking risk.
Tuesday, December 11, 2012
Between the Ticks
There are no lack of crosscurrents as the S&P (^GSPC) continues to coil into the apex of a triangle shown in a chart from this morning's Daily Market Report. (see below)
In addition to Monday's N/R 7 day which implies increased volatility, Facebook (Nasdaq:FB) goes into the index on Wednesday, which often requires selling in many other names to make room.
And then of course there's the fiscal fight: Many market participants seem invested in fiscal cliff avoidance hype (RE: quarter-end and bonuses) while ignoring the capital gains sellers who continue to sell into rallies.
So, this morning we have another opening show of strength.
Will it be just that -- a show -- or can the S&P gain traction over the key 1421 level?
That said, strength today past the opening range could indeed be a change in behavior indicating an extension higher as today is the day before Fed day when there is often a sell stocks program initiated so that if stocks sell off hard on an FOMC Cha Cha, the program can be reversed with stocks being bought back to stabilize the market.
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Greetings from MVHQ where I'm back in the saddle following a nutty few days. Young Ruby is back to her smiling self--she's still the happiest person I've ever met, albeit one with still-nasty cough--but it appears the scare is behind us and that is indeed good news.
In terms of the tape, a few technical levels of note; the NDX (^NDX) 50-and 200-day is right here, right now, so watch for the action/reaction in and around these levels. Over in the Old School, the S&P is trying to trace out a reverse head & shoulders pattern that IF triggered (with a move through S&P 1425), would "work" in a technical vacuum to S&P 1520 (that's 6.7% higher than current levels).
Don't anticipate patterns; just see both sides as we edge our way to another day.
In terms of my personal risk, not much has changed; I'm still long "situations," with a handful of S&P out-of-the-money February puts on against them. I'm delta long small, with positive gamma. Like the Hulk, with less muscles and slightly less-green tint.
As always, I hope this finds you well.
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S&P 500 Poised For Upside Breakout?
If today's upside breakout is preserved into the close -- above 1422-1424 -- then technically we can make the case that the price structure is breaking out of a two-month accumulation-type pattern that has the potential to propel the e-SPZ (e-mini S&P 500) to 1460/65, and then to 1470/75 in the upcoming days.
But remember, much depends on the ability of the index to preserve today's gains into the closing bell.
Inability to do so, followed by a decline that breaks below 1414, will invalidate the upside breakout and reverse the near-term directional polarity.
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Wednesday, December 12, 2012
On a Normal World...
The SPDRs Financials (NYSE:XLF) "risk-reversal" I buzzed about last month is now up 0.37.
BFD you may say, but remember that with the XLF at $15, the "R/R" was a cost free position. So what now? A couple of things to think about: first, on 12/20 the XLF goes ex-dividend by about 0.10. In a normal world that would come off the stock price; by the same token, in a normal and thoughtful world, the dividend should already be priced in the calls. On our cluster-planet, I haven't got a clue on how it may impact the calls. . . I'm just thinking about it. Second, if the thesis to get involved in the XLF was the divergence between financials and financials credit derivatives, logic would argue for getting longer the XLF, not just sitting tight. Financials CDS spreads have - and continue to - collapse, down 12% since Nov. 7 (for ex. MER CDS are down 5% just today. Think Bank of America's (NYSE:BAC) breakout is just a coincidence?), while the XLF is up a paltry 3.2%.
Considering this is now "house money" (I covered the short puts this a.m.) I'm inclined to let it roll. If the XLF gets closer to the 52 week high at 16.44 I will start scaling out.
With Greek PSI bonds having continued to rally since being issued back in March, they may have now reached a peak, but could rally more in the future.
The thinking is that because Greek bonds are written with new English law, it allows the creditors to hold the cards, provided of course that the company can actually pay anything back. With the ECB becoming more progressive on its handling of Greek bonds held through the SMP and official creditors freezing coupon payments on debt, the underlying fundamentals also improve.
However, with a flurry of negative notes this morning from BNP and Commerzbank detailing a "one sided market", the peak at 46 for the 10-year Greek PSI bonds has seen selling ever since. The buyback price was at 40 cents. But something to keep in mind for the future buybacks in Greece as a lot of the remaining buyers are hedge funds or foreign funds, while every domestic bank/pension fund and a number of the foreign banks were wiped out in the recent buyback, those left holding these bonds are looking to squeeze Greece when the time comes.
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Thursday, December 13, 2012
10-Year Yield Breaking Out?
Despite the Fed announcement of long bond purchases, the yield on the 10 year looks like it's breaking out.
TNX shows an Expansion Pivot buy signal, which is a breakout above or below its 50 dma on the largest range in 10 days.
In addition, TNX left an outside up signal bar yesterday.
In the near-term, the implication could be that a sell bonds program translates to buy stocks, but if a triple-top breakout occurs in TNX, it will not be good for stocks.
Interestingly, it is no small consideration that yesterday's breakout is occurring going into what the Fed would probably like to be a yearend markup of the trillions of US bonds that it owns.
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Fed May Have Gotten It Right
As I've been thinking about the Fed's announcement yesterday, I put on my behavioral finance cap on to think about the implications of targeting a 6.5% unemployment rate. As I have said before, QE3 was not enough given the market's deterioration which began late September. Why? The problem all along has been the velocity of money - the movement of capital across the economy. To have forced inflation you need to print money and have economic agents actually use that money. Velocity, then, by definition must be entirely dependent upon psychology. People need to feel confident about the future to transact. Behavioral studies show that people love to anchor on to actual real numbers. By specifically going after a 6.5% unemployment rate, psychologically people may feel even more comfortable taking risk, causing the velocity of money to finally increase.
While I am still formulating the idea, it does appear that QE4 is designed to be less about policy and more about psychology. That may be why it could actually work this time around and force reflation, which is the end goal of SuperBen and the League of Extraordinary Bankers. Our ATAC models used for managing our mutual fund and separate accounts for now agree.
Trading after the auction has been a bit bizarre. The 30-year got run into the auction, only to find a weak bid and an equally weak bid from indirects. Bid-Cover was ok at 2.5 vs the 2.61 average, but bonds are only off about 2bps after the auction tailed by 3.5bps.
So you run em into the auction, the auction tails and you still want em? Did the UK rating change pre-auction squeeze some shorts?
Note the underperformance in the 5- and 7-year sector. Because the Fed is buying less 7-years under QE3 rather than Twist, this is a notable standout.
Keep Your Eye on the Euro
If the Euro breaks 131'20 on the March Future, a significant downtrend line will be breached. As hard as it is to believe, the technicals suggest the move would have follow though and consequences, including downside for the dollar. Such a move would put a floor under the metals as they work through this Japanese inspired selling. Selling them just feels wrong.
Friday, December 14, 2012
T-Report: Gift Horse or Trojan Horse?
I had been mildly bearish, but bearish nonetheless for the past week or so.
I stubbornly kept to it by and large, with an emphasis on short IG19, HYG, and US stocks, while liking China and Greek bonds.
Ahead of the Fed, as we were rising/tightening in anticipation of QE, the new and improved version, I got more bearish.
Well, after the post Fed fade and yesterday's weakness (I'd like to call it atrocity, but that would be overstating things)
I have dialed back to only mildly bearish. Wimpy, yes, but I don't want to look a gift horse in the mouth. I was bearish because I thought the market was overly long and we might see some disappointment. We didn't get disappointment, but did get some clear evidence that the market was too long and too much good was priced in.
I'm tempted to capitulate and just go long. As a whole, the combination of longs and shorts has been good, but I can see a move higher. Fiscal cliff settles into some sort of agreement, people hit the buy button on the way out the door for three weeks. But I am too concerned that this is a Trojan horse. It is too good to be true and everyone sees it.
So I will dial back on shorts, but maintain a small bearish bias. I can't see owning Greek bonds here, so would be out of those. China (and EM more generically) I like. I think Spain and Italy could be big upside surprises next year - the doom meter is too high relative to actual problems.
I think HY ETF's (HYG, JNK) are bad right now and would be short, specific bonds or the much maligned HY CDS are (or in my case, will be) better longs from a risk/reward standpoint.
I don't like the money center banks. Expect big earnings as charge offs decrease and reserves are released, especially at JPMorgan (NYSE:JPM), but the ongoing business actually seems bleak. Volumes in almost everything seem low. Volatility in trading assets is minimal. Spread compression and a flat curve aren't helping net interest income. Nothing really wrong with the banks, just nothing really right either, especially from a significant upside potential.
Anyways, small bearish, market still too crowded and it is impossible to ignore Apple (NYSE:AAPL). Down again, my guess is it bounces, but it is at levels that seem more likely to trigger stops than new buying. It is sad that any one stock can have such a meaningful impact on the indices and market psychology, but it does, so watch that.
An Apple Double-Digit Drop a Day...
Breaking up is hard to do... Breaking down isn't any easier.
We have been tracking a theme with Apple (Nasdaq:AAPL) that now seems to be entering its final phase -- decoupling.
We've seen this phase before... on the way up. There was a time when AAPL somehow always managed to stand out as a winner on even the most bearish sessions.
Then there was coupling. AAPL's maturing uptrend was often credited with rescuing the broader indexes from intraday swoons. Eventually, that sword cut both ways as AAPL's dips took the broader indexes down with it.
Decoupling may be difficult to notice, let alone to prove, when AAPL and indexes both are dropping. But AAPL sellers are not motivated by rotation into other stocks or indexes. They just want out. We have already begun to see diverging price action.
There is no vacuum... Broader themes and implications.
If AAPL is decoupling, then tocks like Groupon (Nasdaq:GRPN), Facebook (Nasdaq:FB), Research in Motion (Nasdaq:RIMM) and Nokia (NYSE:NOK) are left to face the future without that rotation further sponsoring their recoveries. [Seasonal forces of the January Effect could take over, and I will be conducting a webinar on this next Thursday evening.]
If AAPL is decoupling from the broader market, then other metrics should become more relevant to it. That would go beyond my scope. But so long as the product line and its marketing is tied to the youth market, it can't be good to shine the spotlight on our saddling the next generations with an ever-growing public debt. I've already seen reference elsewhere to an inverse relationship between AAPL stock price and college loan debt.
To the numbers...
Technically, AAPL's two "V" bottoms -- last week under 519 and last month under 506 -- reflect too much optimism to launch a durable recovery. And not only is hope still manage to "spring eternal,", but last week's later "V" forming above the prior low reflects even more impatient buying. That could hardly be any more bearish from a contrarian perspective.
My number for signaling the next phase underway has been 526.50. That was challenged earlier this week, but appears to be breaking today. Friday morning breakouts are difficult to reverse if maintained through the close. So, the pattern is very vulnerable next week to accelerating this leg of the decline, presumably next targeting sub-490. Not accelerating the decline by Monday's close would instead suggest that hope is springing eternal, yet again.
We're all about smart market commentary in these parts but we must take a moment to send our thoughts and prayers to the children, teachers and the families who are victims in the horrific Connecticut school shooting.
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