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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Wednesday, May 15, 2013
Long-Favored SunPower Breaking 52-Week Highs, Another Short Squeeze?
My long favored number-one name in solar, SunPower (NASDAQ:SPWR), is finally acting like a top stock should and is breaking to a fresh 52-week high as well as challenging multi-year highs. While the froth in the group is evident, I am still respecting price action and think this name could set up as yet another Tesla (NASDAQ:TSLA)/Netflix (NASDAQ:NFLX)-type short squeeze. I've already bought and sold this one once today (trading around my core position) but am now contemplating and will likely be employing a buy stop strategy (rinse and repeat) as I think it will see numerous breaks into fresh highs in the coming days/weeks.
MEMC Electronics (NYSE:WFR) could also see a similar short squeeze but the % of float short is much higher with SPWR, and the machines can run this one with much more ease in my view.
Bull Market Behavior
Buyers in this market have been waiting for bears to sell, and then they come in after lunch and push everything higher. In told, this was a regular occurrence during the summer months in 1987 -- so how many bears just perked up in their chairs?
If you want to look for exhaustion, then we need to see a bid at the open and they take them into the lunch hour, and then jam it into the close. If we start seeing this, then we know hope has been given up and they want to own them. A few days of this and that would get me concerned. A 4-7 handle drift and then consolidate, which we have seen the last 75 handles, says nothing of bearishness.
Much of this change in posture the market rotated out of over the past 75 days will go unrecognized by the crowd. They are stuck pointing at a top they called 2 or 3 years ago based on similar metrics. Every metric has a life span and this action looks like 2004-2006. You could walk in and buy a. 2-3 handle dip in Google (NASDAQ:GOOG) and kick it out by the bell. Rise and repeat and it worked 3 out of 5 days a week. I would reference the mid-1990's or early 1980's price action, but needless to say I was not trading stocks at that time.
A crude short looks attractive. The bond short is still attractive, today's gap up was a good opportunity to fade TLT. The dollar long trade is another one in its infancy.
Long-Term Vs. Short-Term
The honey badger stock market continues to disregard any weak economic data, pushing higher today with leadership in defensive sectors like utilities, consumer staples, and health care. Indeed, markets have rallied in the face of their outperformance, which is historically unusual, but I still think that it is important for dividend-paying stocks to meaningfully and persistently underperform for a real long-term uptrend in stocks to take place.
Cyclicals remains comparatively cheap and oversold, but by the same token, the last 7 days have been extreme in dividend sector weakness. I would not be surprised at all to see some strength kick back into low beta-sectors. For a real move to take place in cyclicals, which have badly lagged this year, the longer-term direction in dividend stocks relative to the S&P 500 should go lower.
Thursday, May 16, 2013
Monday, May 20 is 90 degrees square 130.50.
So, a test/undercut of the presumed selling climax on April 15 in gold (NYSEARCA:GLD) may be playing out as the volume at that time dwarfs anything we've seen this year.
Once again, I would look to be a scale-in buyer near 130 GLD.
See GLD daily for 2013 with volume here:
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Just a quick observation: I was struck by the number of comments I saw this morning using the term "melt up" but in the future tense - that is to say the melt up is yet ahead of us, not behind us.
Market tops and bottoms are moments of extreme extrapolation. What is good or bad now will only get more intense from here.
That so many pundits are suggesting that we are only in early 1999 now with the real momentum yet to come gives me pause, particularly as many of these same pundits were talking about the markets two weeks ago as if we were in 1994.
Was That the Bottom in Bonds
Weak economic data continues to suggest that the bond market is (still) much more right than the stock market, as yields on longer-duration Treasuries fall after declining very hard for the past two weeks.
The honey badger stock market continues not to care, however, as many intermarket trends remains out of sync. Defensive sectors are now very oversold themselves as money begins rotating into more cyclical trades. The US Dollar remains an important issue to watch.
Should the recent surge reverse, commodities and emerging markets will likely catch a strong bid. However, the Fed has let the cat out of the bag as far as a potential end to QE, complicating the overseas trade. Within bonds, Treasury Inflation Protected Securities appear to be a good play for now.
Friday, May 17, 2013
Inflationary Pressures Are More Wishful Thinking Than Reality
A quick screenshot of a random assortment of commodities shows virtually all are down this quarter-to-date. (see chart 1)
So inflation isn't coming from commodities.
In spite of the "great" NFP data release, we aren't seeing real wage inflation pressures. (see chart 2)
The average YoY change in hourly earnings is under 2% and has come down from some signs of life early in the year. This comes from that "great" NFP report, which frankly was really only okay and mostly reduced fears that the job market had been falling off a cliff, rather than showing any real "jump for joy" strength.
They were not bad numbers, but they were also nothing out of the ordinary for the past 3 years, so it would be surprising if wage inflation was suddenly a material concern at the Fed or for the markets. The markets are almost desperate to have wage inflation, but it doesn't seem real.
This leaves housing inflation, which is real. That area is doing well, and at 40% of the CPI, it is important, but it has less influence on the Fed's favorite measure and will struggle to stoke inflation fears by itself. Without wage inflation (still hard to get with so many people around the globe willing to work at a fraction of the price) and commodity inflation, the "inflationary" pressures seem more wishful thinking by the "growth" crowd than reality. Growth and Inflation may be less correlated than many realize.
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Tesla and the Principle of Tests
In keeping with the Principle of Tests, yesterday Tesla tested Wednesday's large-range reversal and turned its dailies down today.
It's worth noting that following an ORB this morning (a downside break of the first ½ hours range), TSLA squeezed higher before the real directional bias reared its head.
Stocks have their own personality and TSLA has the squeezage issue down pat.
The behavior following this turn down on the dailies after a test of the signal reversal bar will be important to watch for clues as to the stock's position.
See daily TSLA from April and 10 minute for today here:
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