Buzz on the Street: This Bull Is Half Honey Badger, Half Terminator
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, May 13, 2013
Hilsenrath and Fed Taper
I again think we're overreacting to the idea of Fed cutting back on purchases, but it seems that the market is more fragile to such test balloons than it was before. The first test balloon for this was back in February. And again, this is certainly not the last thing we're going to see. There isn't any great shakes in this article, just a rehash of things we already know, except for two takeaways:
"Fed officials aren't very concerned about the annual rate of inflation falling toward 1% in recent months, well below their 2% objective. Because expectations of future inflation have remained steady, many Fed officials expect inflation readings to move back up toward 2% in the second half of the year. "I'm not too worried about it," Mr. Plosser said. 'Expectations remain pretty stable.'
So it seems they view the deflationary pressures as transitory, which is somewhat troubling. We know that for the most part the higher taxes haven't passed through to the economy yet. Consumers continue to spend roughly the same, in line with any increase in income, and save less. Whether or not this changes leaves a big airpocket to the downside. Any decrease in consumer spending will transfer through to a decrease in inflation. If this becomes sustained and the Fed decides to ease further, game over. We all know how that will end.
The other is the comment about uniform tightening of policy, a la 2003-2006 rate hikes. This one kind of seems bizarre, but I guess it reiterates that a change in policy isn't a one way street, so more of a caveat. As in, if they cut purchases they can always add them back. They should be more afraid of the rapid tightening in 1994, where in a 13 months they tightened by 3% and rates blew out.
If and when they do taper, I've always thought it will come in mortgages vs Treasuries. The agency MBS line with "implicit guarantee" and the fact that it's a certain market means the line is blurred with monetary policy and targeting asset prices.
Frankly, I think this article reads like an interview with Dudley. I have to check his last speech, but if memory serves, it brings up a lot of the same points.
The "Bond Bubble" Paradox
The long bond was down over 1% at one point last night. Stocks were barely down at the time. Since then, bonds have rallied and stocks have done a bit worse. CDS in Europe is weaker.
The “bond bubble” paradox is this:
- Something (in this case, the Hilsenrath article) causes the market to get concerned about treasury yields, sending them higher.
- Higher treasury yields drag investment grade and high-yield bonds along for the ride, eventually causing equities to look expensive.
- The sell-off in risky assets (high-yield and equities) accelerates sending money back into the relative safety of treasuries.
- In the end, treasuries, the alleged root of the problem, perform well, and equities get hit.
Some reasons that the “tapering” of QE could cause this exact sort of scenario are:
- If QE helps the economy (and allegedly it does), then pulling back on QE will hurt risky assets more as the economy is impacted.
- If QE money has been flowing into risky assets (and given the trajectory and correlation of risky assets, it is hard to argue otherwise) then risky assets will be hurt the most.
Long Bond: So Far, Nothing Different Than the Prior Headlines
The 30-Year Treasury Bond (US1) has taken a decent beating in the last 7 trading sessions, and it now sits below the 21, 55, and 144 Exponential Moving Averages (these MAs are the commonly used levels in the futures pits). Moreover, the 21 and 55 EMAs are downward sloping. This is not the first time the long awaited collapse of the long bond (count me at the head of that crowd) seemed at hand, only to painfully squeeze the shorts for the umpteenth time.
Nevertheless, two important levels are getting closer: the daily TDST Level Down at 142-31, and the weekly TDST Level Down at 139-30. Should either of these support areas cave - particularly on a qualified basis - it would indeed be a change of character. There has been no qualified break of a weekly TDST Level Down line since late 2010.
I can't repeat enough how inexpensive are the options on the US1 futures. At implied volatilities of about 8.5% across the calendar, they are cheap on absolute and relative basis. Going long at-the-money straddles 1 to 2 months out, around technically important levels has been a profitable strategy for me. For those not trading in the futures markets, options on the iShares Barclays 20+ ETF (NYSEARCA:TLT) are also fairly valued on a relative basis, but they are also 5% more expensive in absolute terms. If using the TLTs, spread strategies might be more prudent.
Tuesday, May 14, 2013
Parabola, Aisle 5
When the market gets frothy, I like to look for frothy stocks. They can make for a great quick short opportunity. Running through screens I spotted Biogen Idec (NASDAQ:BIIB). I used to love this stock as a long back in 2009-2011; great company, and a great story… back then. Now let's fast forward to 2013. Slowing revenue growth down to 8% year over year. Price to sales of 9 times! And all you have to do is pay 36 times forward earnings. This, my friends, is a bad deal.
Looking at the charts we have a nice opportunity for a short set up too. MACD rolled over at the recent high, diverging RSI, potential for a double top after a parabolic move, and it hasn't touched its 50 day moving average in the last 35% move. Current prices set up a short stab from here with a stop above recent highs and a target of the 50 day moving average. That allows for about a 5:1 risk versus reward. I like those odds and plan to watch it closely for a short with in the coming days.
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Emerging Markets (EEM) Battle Back to Neutral
After ending 2012 in style, the Emerging Markets lost steam and began a multi week pullback to its trend line. In fact, in early January I cautioned on a potential Emerging Markets (NYSEARCA:EEM) change in character. For many investors, the lack of follow through in the Emerging Markets ETF has been frustrating. Cheap money and a late year run higher had raised hopes… but it has been all US Equities this year.
That said, in recent weeks, EEM has battled back. Looking at the weekly chart below, you can see that although painful for many investors on a relative basis, the pullback did not do any significant technical damage. Although the June 2012 uptrend (support 1) was broken, the longer-term trend from October 2011 (support 2) stayed intact. And the latest lift even saw last week's candlestick poke above the downtrend line; however, one caveat: EEM closed back on/below that line last week. As well, last week’s candle stick left a long wick, pushing up all the way to fully backtest the broken June 2012 uptrend support (1). Follow through to the downside would be bearish.
So where does that leave the Emerging Markets? Well, that long-wick candle is concerning, so it may be wise to wait for a move back above last week’s highs. It would also be constructive if EEM could retake and hold above the downtrend line. On the downside, keep an eye on the longer-term rising uptrend (support 2) – that needs to stay in tact.
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Steady as She Goes
The pristine price action continues--breadth is better than 2:1 positive, the financials are leading (keep an eye on BKX (INDEXDJX:BKX) 59 on a closing basis) and the tape continues to feel firm and perky. The last tangible grasp for the bears comes into play in and around S&P (INDEXSP:.INX) 1650, per the chart below; if past performance has any bearing on future results, a "back and fill" of that trend channel would work to +/- S&P 1600.
While I've been chilly -- thankfully, there was some discipline nestled within my process -- these things happen if you trade for as long as I have (23 years and counting). There was an equally compelling hot streak that preceded the current cold snap but as the adage goes, you're only as good as your last trade, and I own my missteps. I won't dwell either, as profits reside in the ride ahead.
The level of lore is now S&P 1650, which is the upper band-tag of the channel that has defined this rally since November. That -- and BKX 59, on the close -- will help define the next meaty move, be it yet another breakout or a retracement lower.
Again, all signs point to the former storm, but I don't think anyone would be shocked to see a tape take a breather. Either way, the tape will show us the way--and if we boogie higher still, I will be stopped out of the second tranche of the S&P short I added late last week, and limp back to the dugout to prepare for the next inning.
As always, I hope this finds you well.
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