Buzz on the Street: The Bears Put Up a Fight
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, February 25, 2013
Traders walked in this morning a little surprised at the size of the gap up and the overall strength/quickness of the bounce back from Thursday lows of around 1497-1498. If you used a Tactical Trading 101 type approach and faded the open, it has paid off. Some may have thought it possible for the market to potentially go negative today, but I don’t think many expected the market to break Friday’s low and come within a few handles of Thursday’s low (today’s low in the S&P so far is 1501.88). Sometimes if you take a flexible, prudent approach at strategic times, you could get rewarded.
Traders are always looking for clues about which direction the market could move, and recently the financials (and the homebuilders to a lesser extent) have been a market leader and useful guide. When the Financials (NYSEARCA:XLF) broke down and filled its gap in the first hour of the session, it was a sign that the market could come under some additional pressure. Goldman Sachs (NYSE:GS) has been leader in the sector, but it was fadable of the open too. You could make the case that the 8-day moving average acted as a little bit of short-term resistance on the bounce for GS.
Right now overall it’s best to take a tactical approach until we get more commitment to either direction. If we close around here, I think I would have to be slightly more neutral-to-negative rather than neutral-to-positive on a short-term basis.
Traders who were grumbling about the melt-up should be embracing this newfound volatility and two-way action. On a more swing trading basis, though, when things start to get sloppy near highs and volatility starts to increase, it can sometimes be a sign that a deeper correction is imminent. Either way, I think this is an area to stay on your toes and be tactical.
On a side note, there continues to be great tradable action in the 3-D printing sector. Disappointing earnings from 3D Systems (NYSE:DDD) led to a big gap down this morning, but the stock, and its sector counterparts, have been able to bounce back impressively. If they are able to finish the day positive, or almost positive, it could potentially mark a short-term bottom in the group. The 3-D printing trade right now is not all about valuation, it’s about the potential future of 3-D printing technology that hasn’t been realized yet in EPS.
I've been watching the EUR/JPY get utterly demolished over the past 4 hours and it's now broken down out of its downward channel and negated that bullish flag that sorta saw follow through today. This is very bearish for risk assets. (and one UGLY daily bar)
The Yen strength is rolling over into Treasury strength, and we're seeing what appears to be bottoming, as a lot of shorts likely covered today. Treasury futures volume has seen the entire open-interest roll over in the 10-year, long bond, and almost the 5-year. Keep in mind though that the futures roll is occurring today, so this could be distorting some. The 7-year sector is leading on the curve as it has been a favorite of late. (7/30 or 10/30 trades).
In terms of the Italian elections if you are looking for catalysts, the final election results are due at 3 p.m. EST, or 8 p.m. GMT.
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Flight to Safety in the TLTs?
Increasingly, the iShares Barclays 20+ Year Treas Bond ETF (NYSEARCA:TLT) looks like it is carving out a February bottom formation between 117.30 and 115.50.
Today's sharp decline in the TLT during the first hour of trading-- when the equity indices were rising sharply towards last week's high at 1530 -- pressed to 116.29. However, that action has been reversed with power, leaving behind yet another spike-low within the bottoming formation.
As we speak, the TLT is attempting to push up through Fri.'s high at 117.34, which if sustained, should trigger upside continuation towards 119.00. What exactly that might mean fundamentally, well, I am not sure. But it probably does not bode well for the equity indices, and might hint that Mr. Market is becoming increasingly nervous ahead of Bernanke's Capitol Hill testimony tomorrow morning AND ahead of the Sequester that investors seem to be ignoring.
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Tuesday, February 26, 2013
The Gods Must Be Crazy
This morning's Wall Street Journal offered the following take on the incoming Bank of Japan governor:
"Haruhiko Kuroda's first job as Bank of Japan governor may be to convince people he is a little crazy.
That is because the former finance-ministry official, who is expected to be nominated this week to be Japan's next central-bank head, would be given the task of reversing 15 years of price declines that have scourged the Japanese economy. To do that, economists say, he would have to convince investors, businesses and consumers in the world's third-largest economy that the central bank will do whatever it takes—including buying unlimited amounts of government debt as well as anything from stocks to foreign bonds—until deflation is whipped.
"Unless you put people on top who are that crazy, the market won't believe them,'' says Naohiko Baba, chief economist at Goldman Sachs in Tokyo."
In the world of investing, perceptions form reality. That said, I would strongly encourage you to consider the notion that central bankers must need to be crazy in order to succeed.
Talk about an interesting milestone along the journey.
A person’s character is not determined by how he or she enjoys victory but how he or she endures defeat.
-From a conversation in Netflix's original series House of Cards.
The market’s recent two day decline has been highlighted by two almost 90% down days, and there has been no rally attempt of a similar magnitude. In addition, some of the intermediate term indicators that I follow such as percentage of stocks above 40-day SMA and McClellan Oscillator are not yet oversold.
Also, it’s important to keep in mind the recent underperformance by the Tech heavy QQQ. We understand that the main culprit could be Apple (NASDAQ:AAPL), but it is still interesting to note that the 200-day SMA is lurking close by (today it is at 65.7) and indexes often gravitate toward major support.
Unless the market puts in an impressive show of strength by way of vigorous and enthusiastic buying, I fear that the selling may not yet be over and I have positioned myself accordingly for a short term correction.
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Not So Heavy Metal?
Agnico Eagle Mines (NYSE:AEM) turned its daily chart down for the first time since last weeks low.
Bullishly, the turn down defined a low—at least in the short run---which was followed by an ORB (opening range breakout).
In so doing, AEM has scored an outside up day.
I continue to think that last week marked a cyclical low in the metals (backing and filling notwithstanding) defined by Spike Volume Bottoms in Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV).
Yesterday the dollar exploded and the metals were up on the day. When is the last time you saw this kind of action?
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Wednesday, February 27, 2013
Not Backing Down
A violent move back higher in stocks has Novueaux Bulls screaming that they were right all along, and that intermarket deterioration is meaningless. Are they right? Maybe - though from experience such thinking has a funny way of breaking one's performance. Bonds have held, defensive sectors have been strong, and as I noted in my Lead-Lag Report there is corrective behavior all over the place which is entirely inconsistent with bullishness. I will not back down until intermarket trends say I should. The fact is bonds (attached image) ARE outperforming stocks. And I suspect this trend is early. Our ATAC models used for managing our mutual fund and separate accounts remain defensive as the deflation pulse beats at the same time no one is listening.
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I Need a Miracle!
While I've spent a fair amount of time pulling together my presentation for The Social Mood Conference (the early bird special expires in two days), I've kept close tabs on the tape (having multiple screens allows one to do that). What am I seeing? Well, a few things, in no particular order:
The Gold Yo-Yo continues; up strong, down strong, up strong, down strong. If the correlation continues, the S&P 500 (INDEXSP:.INX) should follow suit in the next few sessions (unless of course that's too easy).
S&P 1520 (give or take) is a level the bears are watching; if they stop the bulls in and around there, they can claim three "lower highs" in this last spate of volatility.
I don't know about you but I tend to trade better when I have fewer positions; of course, this is coming from someone who used to trade 200 positions at a clip.
Apple (NASDAQ:AAPL) is punishing those who bought into the "stock split" hype yesterday, proving yet again that invisible catalysts are dangerous catalysts.
I'm still holding my Potash (NYSE:POT) calls as they offer a nice and tight defined risk. This, however, is just a trade and will be treating as such (win, lose or draw).
On a housekeeping note, I'll be back in the hospital tomorrow morning for the first in a series of treatments designed to avoid a hip replacement. My doc is the anti-scalpel--non-invasive to the core -- but when he saw the X-Ray last week, he said it would take a miracle to avoid such a procedure (cue the horse!). Again, not bummed--I finally found the root cause of decades of pain--just keeping you up as I likely won't strap into the 'Ville until 1 p.m.
As always, I hope this finds you well.
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Dell Acts Well
I've been long Dell (NASDAQ:DELL) options since February 13 as a bet on a potential higher bid.
This position has been a loser thus far in terms of P&L (due to time decay of the options), but the stock has been steadily creeping higher since the Feb 5 bid of $13.65/share. Note that the stock had already been rallying on speculation of a deal. (see the YTD chart below)
The stock's now 2% above the bid price -- could we be about to see some good news on the price? I'm just monitoring here (as opposed to buying more) but this seems like a situation that may be about to get very, very interesting.
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Thursday, February 28, 2013
10-Year Future Key Support
Lots of air below for ZN (ten year note futures) if it can't hold yesterday's lows. Key level right now is 132'210 (March contract, I will switch to June Friday).
I have a few interesting long-term charts I will share after the close of the month. Tomorrow is a critical day. Hint: SPX must close above 1518.
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Good Volume or Bad Volume?
In yesterday's melt-up, volume in the SPDR S&P 500 (NYSEARCA:SPY) was about 1/2 of what it was in Monday's drop. The textbooks say that volume = validation, so a down move down on high volume followed by a sharp move up on low volume should be quintessentially bearish. The problem is that textbooks have stopped working moons ago. If one accepts that the SPYs have become the domain of hedge funds as protection vehicles (i.e. to short vs. a long book) then the volume implications are arguably flipped upside-down. Less volume = less hedging / shorting. I'm inclined to ignore the volume patterns here and I rather focus on patterns. Away from DeMark counts (already discussed in prior buzzes and articles) the whippy action of the last several trading days suggests uncertainty and lack of commitment. That's why "megaphone" tops are generally considered bearish patterns.
If we get a marginal new high, which is then rejected with authority we may well get the 5-10% correction many expect.
Spying on Gold
All that glitters may not be gold, but this trade has the potential to add a few lucky charms to your bottom line. For those not familiar with pair trading the basis is to go long one position and short another in equal dollar amounts. Professional traders often use a market neutral strategy by pairing two very similar companies (ex. long Home Depot (NYSE:HD)/short Lowe's (NYSE:LOW) and trading their spread in what is called "Correlated Pair" trading.
When we view the spread of long SPY/short Gold (NYSEARCA:GLD) you'll notice the pair recently has traded all the way down to -75 just a year and a half ago. Recently, the pair has broken out of a Cup & Handle formation and sits just below a congestion area of resistance. This level has the potential to give the pair some trouble in its bull campaign, so I would look to a breach of resistance for upside acceleration and a gain in daily ATR. A recent "Golden Cross" along with strong demand at the 20MA help in defining trade parameters for entry levels. Currently, the pair is trading very close to par with an upside target in the $45 - $75 level.
This trade works best as a day trade for most purposes and can also be carried out with Futures instead of Equities, although charting contracts will result in a slightly different look. Important to note that because one is long SPY and short GLD - this doesn't imply the S&P is headed higher and Gold lower. What one is trading is the relationship between the two a.k.a. "The Spread." The ATR (Average True Range) measures how far in price the pair trades over a look-back period that can be altered by the trader. What this gives us is the ability to determine at which price profit taking should commence.
I hope this trade works well for those ready to dip a toe into trading pairs! It's a lot of fun and for me, a pleasurable way to trade that's much different than scalping or swing trading. Take a look at the charts below and go get 'em!
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Friday, March 1, 2013
Well, it's March 1 and the dreaded sequestration "cuts" are slated to begin, except as I understand it those spending cuts will not actually "bite" until March 27th. If that's correct, our legislators have until then to arrive at a deal. Then, using their "magic erasers," they can erase everything back to March 1st and sequestration will be pinned to the great media hype wall just like the "fiscal cliff" and Y2K. As I understand it, sequestration will cut defense spending, domestic discretionary spending, and Medicare reimbursement rates. Plainly, defense companies, Medicare services, certain domestic programs, and anyone with exposure to Washington, DC will be negatively impacted. For the record, discretionary spending is all programs that are not considered entitlements. If allowed to commence, sequestration would cut spending equally between national security and discretionary spending by an average of $109 billion per year for the next nine years.
So, the dateline looks like this. March 1 - The Sequester: Large spending cuts are set to begin. About half would be in defense. This is set to subtract 0.7 percentage point from GDP growth this year absent any multiplier effects. However, it's unclear when the cuts to spending will be made (if they are not postponed again) and exactly what will be cut. March 27 - The Continuing Resolution: Without a real budget (last seen in 2009), federal spending has been authorized through a series of CRs. Most likely, we'll see another one. May 19 - The Debt Ceiling: Treasury reported that the ceiling was breached on December 31, but (through "extraordinary measures") the drop dead date was expected to be in the second half of February. There was not enough time for the new Congress to work on a possible budget deal. Lawmakers now have until mid-May to achieve a plan to reduce the deficit over the long term.
Yet amid all the negative sequestration talk, consider what Stan Druckenmiller said, "If you normalize interest rates to where they were before QE, and use a 5.7% funding cost for this debt, that's $500 billion a year in interest expense. Because of this the central bank can't raise rates; it has to keep printing money." And, as long as rates are low, and liquidity is high, the downside in the stock market should be limited. So, given yesterday's upside failure, look for attempts to sell stocks off that don't get much downside traction.
I attempted to cover a balance of a short position I re-established over the past two trading days into the morning dump. SPY 150.50 was the level I pegged for about 40% of my position and I scaled out of a portion on the surge back up. It is easy to get caught up in these wild swings and lose sight of your thesis.
At this point, I'll be waiting for a break of 1525 or 1480 to play the market next trend. Lot of talk about is this 2011 or 2012? We are at that crossroad now, see it in the chart below.
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Deflation Pulse Beats Faster
Like it or not, the risk-off trade is working. The dollar is doing well, bond yields are falling, and the market is favoring dividends again. High beta small-caps and emerging markets aren't showing any major excitement, and the sequester appears to be a headwind for those in the deflation camp. Our ATAC models used for managing our mutual fund and separate accounts have maintained defensiveness since the end of January, and are unlikely to change in the weeks ahead given the prolonged disconnects occurring internally within the market.
The long-awaited correction may be just about to start, though factually those that have played bonds for a trade during the last 4 weeks haven't done that bad at all. Beware the return of the Gray Haired Bears - they might break the Nouveaux Bulls alongside the market.
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