Buzz on the Street: The Bears Wake Up for Dinner, and There's an Apple on the Menu
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, October 8, 2012
Bearish on Caterpillar
Caterpillar (NYSE:CAT) made a new 52 week relative low on Friday. The relative chart versus the S&P 500 has already confirmed a double-top formation and the price chart is poised to do likewise. Falling through the July low of $78.25 would trigger the top and activate a target back down to $21, the region of the 2009 low! Needless to say, the awful downside potential on the CAT chart implies a weakening global economy.
Momentum is not oversold as evident from the 14-day RSI and that should enable further near-term weakness. Shorts are suggested and a break above $87.34, last Friday's high, could be used as a stop-loss.
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Took a Small Short in Netflix
Netflix (NASDAQ:NFLX) has continued its rally from early in the day on the Morgan Stanley upgrade. I suspect the stock will deflate near-term after its huge move off its $53.05 low on September 26, so I took the opportunity to short some near-dated, out of the money call spreads.
These will expire before earnings, at which point I'll be looking to reload on the short side as this rally (which has happened on no meaningful news) has the stock pricing in an absolute blockbuster quarter.
Big Demand For VIX Calls
Two weeks ago I penned a piece (and took a position) on the belief that options had become relatively inexpensive and on expectations that volatility would increase as some events such as Euro meetings, U.S. election and earnings season would lead to larger market gyrations. I suggested playing this through the outright purchase of SPY options rather than using VIX related products such as futures or the iPath S&P 500 VIX (NYSE:VXX) or the options on said products, simply because the latter, as a derivative of a derivative makes it more complicated and creates a dampening effect on pricing behavior.
We are seeing that play out as S&P option prices and implied volatility levels have held steady around the 14%, but the VIX futures and the options on those products have both declined and seen a dramatic flattening of the term structure. That is the values are as expected reverting to the mean and the longer term futures no longer carry the large premiums to the either the cash or shorter term contracts. For example two months ago, even in the doldrums of August when the actual or realized volatility was 10%, the September VIX futures were 14% the October VIX futures were trading around 18%, the November futures were 22% and the December contract was 26% ; basically you had a 20%-35% premium month to month. Those numbers have now collapsed to October trading 14%, November 15.35% and December 16.55% or about a 7.5% premium across each month.
But that hasn't dissuaded institutions from turning to the VIX products as a means to hedge their portfolios. As the chart below, courtesy of TradeAlert.com, shows open interest in VIX calls has hit another record. And while some of the steady increase in call open interest is a function that the product is used primarily as a hedging tool so that call interest should outpace puts. But note how the put/call has expanded over 2.1. Compare this to put/call ratio on S&P 500 or other broad indices which will average about 1.5 put contracts for each call traded, but open interest levels tend to hover around the 1.2 level.
Granted the VIX is now relatively inexpensive and will spike if there is a sharp market correction. But I still think that using these as broad portfolio protection is the wrong approach. Also, do not take this call buying binge as a contrary indicator, that is as bullish, as it is hedging.
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Tuesday, October 9, 2012
It's Important, So I'm Repeating It
A lot of folks insist that Apple (NASDAQ:AAPL) is the most important stock in the universe. Given it's the largest company in the world, with roughly $600 billion in market cap, it's hard to argue with that. Here's another reason not to argue.
I juxtaposed the chart of the NDX (^IXIC) vs. AAPL just for schnitz and giggles. While they more of less mirror each other, you will see that Apple breached the right shoulder of its Head & Shoulders pattern (which works to $610 or so) while the NDX has yet to trigger the dandruff discussed above.
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The Nouveau Bulls
On CNBC last night, I made the case that there are way too many "noveau bulls" out there. There seems to be some strange belief that because central banks around the world are pushing more liquidity and stimulus into the system, declines in risk assets can not happen. I find this to be a very dangerous way of thinking.
Anecdotally, all I hear now is bullish rhetoric. Where these people were when I began arguing for another stock melt-up June 4th, I am not sure, but it does seem to me that there is a certain type of bravado in the thinking that central banks would prevent a correction. I hate to break it to you folks, but it is not the Fed in action which makes markets move up or down - it is expectations.
I remain broadly bullish on the reflation theme into the rest of the year (the Fall Catalyst), but I think it's time for markets to refresh the fear, and pull-back in a way that scares the nouveau bulls before surging to new highs. Will it play out this way? I sure hope so - would be a great tactical opportunity to buy back in at lower stock prices.
Venezuelan Bonds Cracking on Chavez Win
Sunday evening, Venezuelan President Hugo Chavez won his third re-election campaign. What does this mean?Before the election, some investors were loaded up long on the idea that contender Henrique Capriles would win (polls leading up to the election suggested this) thinking that he would reduce the government controls over the biggest oil producer, Petroleos de Venezuela (PDVSA) and boost economic growth.
Earlier this spring, Argentina nationalized oil & gas producer YPF. It would not be a foreign concept for Chavez to follow down this path and nationalize PDVSA next. This morning, both Venezuelan bonds and PDVSA bonds are getting hammered on this fear and the perceived lack of economic growth in Venezuela. The Venezuelan 10-year is down 3 1/2 points since last Friday's close (yesterday was light holiday volume) and the bond already carries a 9% coupon.
Might it be that last week's sudden drop in oil was linked to the potential for Venezuela to boost production once Chavez was out of the presidency?
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Wednesday, October 10, 2012
Do We Buy the Dip?
Kudos to those who caught the dip yesterday in Apple (NASDAQ:AAPL), I was not one of them. There is a shift in market character going on. The market has felt and acted heavy since Fed day, although we are only 30 handles from the year's high. Of the growing concerns I see, toss in lowered guidance out of Cummins (NYSE:CMI) and Alcoa's (NYSE:AA) earnings call last night you've got to be cognizant of the macro landscape outside of AAPL and the Fed.
Toddo did a great job in his buzz post yesterday with the charts. NDX, AAPL, SPX (INDEXSP:.INX) and toss in the RUT (INDEXRUSSELL:RUT) are all sporting ugly charts. From a sector focus, the TRAN, IYR and SMH are all at critical levels that need to hold. So we are at an inflection point? Do we press the gas and buy this dip?
This seems like the fall of 2010 again when we were trained to buy the dip by Fed policy, in fact there is an entertaining Youtube video. Looking at a chart of the CPC put call ratio 20 day moving average overlaid with the SPX, you can see this isn't an area that historically paid to double down on risk. Watch the COMPQ into 3000 and the RUT into 815. These are must hold levels for the near-term.
The compelling asset class I see at the moment to purchase are the banks; JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC) and Goldman (NYSE:GS) as a pure trading vehicle. I am long all 3.
Regarding AAPL, last night I was giving some thought to the last bull market and how the main tech component, Google (NASDAQ:GOOG), was a buy the dip day in and day out over 2006 and into 2007. Every 20 point drop swing traders could lay out a menu of bids. Each mornings gap down, day traders had a better average than Ted Williams by biding for stock. Swing away, but know that cycles come and go.
The remarkable symmetry with the March/April highs continues (see the chart), both in terms of chart patterns and sentiment. Selling the rallies is the name of the game now if this script plays out. The odds that the year's highs are in are pretty steep, even if we get a year-end rally.
ES (SPX futures) support below 1431.25 is 1426.50. Resistance is at 1439.50, bulls get it back above 1444, a wall of resistance now.
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Nat Gas: Looking Higher
The key question for natural gas (looking at the nearby futures chart) is whether all of the action since the October 2 is a high-level consolidation area ahead of a forthcoming upside breakout. Or, whether a correction was completed from Oct 2 (3.546) to Oct 8 (3.327), which means that a new upleg already is in progress that projects sooner than later to 3.700.
With tomorrow's natural gas inventory data once again looming large, my intermediate- and longer-term technical work suggest strongly that the data will not have a lasting negative impact if worse-than-expected. However, if better-than-expected, this could trigger a vicious new up-spike to 3.700-3.750 in a hurry.
ETF traders may want to watch the U.S. Natural Gas Fund ETF (NYSEARCA:UNG) and the ProShares Ultra DJ-UBS Natural Gas (NYSEARCA:BOIL).
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Thursday, October 11, 2012
ES Morning View: Holding Support
The S&P futures (ES) contract held support overnight. Note that support is at the confluence of the 50sma, the 1424 Double-top neckline, and the June-October buy-channel trendline.
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Wash & Rinse, Repeat
An hourly SPY seen below shows a 5-wave decline into yesterday's low (3 waves down separated by 2 little corrective waves).
Yesterday's decline also just missed satisfying a test of the 50 dma. Was it close enough for government work?
While a bounce off the 50 the first time down in a long time is the normal expectation, the potentially bearish news is the impulsive character of the 5 wave decline.
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To Fade or Not to Fade -- THAT is the Question!
With the S's approaching resistance -- and the N's now above the right neckline -- the obvious question is begged: Should the bears be using this price action to their advantage?
While "where you stand is a function of where you sit," I would offer: "not yet." Apple (NASDAQ:AAPL) has room to run before its date with destiny at $650, the financials are firm and firmer and perhaps most interesting, breadth is 5:1 positive.
Successful trading requires a high "quack count" (when all our ducks align) and it's simply not there for the bears, at least not yet. The bulls? They're dancing between the elephants but that's their prerogative; I would offer that they should keep an eye on their chairs, however, lest the music suddenly stops.
As always, I hope this finds you well.
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Friday, October 12, 2012
The gist on the street for the Wells Fargo (NYSE:WFC) and JPMorgan (NYSE:JPM) earnings was that it didn't knock anybody's socks off. WFC's net-interest margins was a big miss, dropping to 3.66% from 3.91%, and their mortgage business left something to be desired. It seems that expectations were too high and the quarter missed those by a long shot. Bloomberg notes that this is the steepest drop after a 3Q earning for WFC, second only to last year's drop of 8.4%. Volume is already at 60% of the 15-day average in the first 30 minutes.
I did find it interesting that WFC held onto almost $10b in single and multi-family loans. Does this mean that because rates are so low, banks are going to migrate towards keeping the loans on their balance sheets and just servicing it themselves?
Bonds have been strong since 6:30 this morning and continue to head towards lower yields. The uptrend isn't officially broken yet, but it's getting closer. If you are long, you could look towards 1.61% and 1.55% in the 10-year as profit taking areas. The curve continues to flatten and breakevens are lower (indicating inflation expectations are declining).
The word for Europe is that the next step for Spain would be to get the "precautionary credit line" from the ESM now that it is setup, similar to the one it got from the EFSF. This would be a trigger for Draghi to step up to the plate and begin buying bonds. What I am most curious to see is on what scale he goes about this, because the previous efforts weren't large enough. The previous program, the SMP, has largely done more harm than good. It has weighed on the refinancing needs of countries like Greece, by owning mostly short-dated bonds and being asked to be repaid in full.
Holy cow! There's another huge jump in the Michigan consumer confidence index, the second in two months. However, it is worth noting that the weekly Bloomberg consumer comfort index has seen a similar jump over the same time frame (from -47.4 to -36.9), and is already starting to trend down.
Good luck today!
Facebook's TechCrunch Bounce Is Almost Gone
Below you'll see a chart detailing the action in Facebook (NASDAQ:FB) since 9/1.
The stock bottomed at $17.55 on 9/4.
On 9/11, it closed at $19.43. After the close, Mark Zuckerberg participated in a very well-received interview at the TechCrunch Disrupt Conference. Zuckerberg's bullish outlook on mobile advertising in particular sent Facebook shares flying up the next day to $20.93 -- an 8% gain.
That party continued until 9/19 when the stock hit an intraday high of $23.37.
Since then, the stock's been knocked down by a combination of factors, including the risk-off trade, the downgrade from BTIG, a few analyst target price cuts, and the mess at Zynga (Nasdaq:ZNGA).
I still have a big short position in Facebook, but the rapidly-renewing negativity has me considering cutting down the size of the trade.
The stock's basically roundtripped since the TechCrunch conference, and it is very close to that $19.43 mark, implying that expectations have come down very quickly. In fact, given the big decline, I wouldn't be surprised to walk into an analyst upgrade or otherwise bullish research note on Monday.
Just thinking out loud here -- I haven't acted yet, and I don't know that I will.
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