Buzz on the Street: The Bulls Put on Their Party Hats
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, March 4, 2013
Yellen gave a speech this morning on monetary policy, again super dovish, but no big surprise there. Reading through the speech, it looks to be a close copy of the speech she gave about three weeks ago, be careful in judging the speed at which we tighten monetary policy, yadi yada.
Some interesting info from the CME this morning, February Treasury futures volume was up 33% Y/Y and Treasury options volume was up 71% Y/Y. Given that we saw multiple days where the entire open interest turned over, we can conclude that there was a bout of new longs or active hedging activity (for MBS). Particularly, in early-mid February, we saw what appeared to be bottoming activity as there was heavy volume and a "Doji" bar.
There is chatter that Italy is set to be downgraded after the European close, but to be frank I'm not sure by which ratings agency. It may be Moody's, as they said the new election outcome was credit negative, and I don't see any commentary from S&P. Fitch has been negative on the elections, but not nearly as vocal as Moody's.
I was just pinging back and forth with a good friend and he pointed out that an Italian downgrade should have more effect on the rest of Europe than for example, a French downgrade. I agree. A French downgrade, for example, doesn't go "down" the food chain to the peripheral nations, whereas a peripheral downgrade hurts everybody as they are owned by the "core" nations.
Our friends at ETF Securities noted in their weekly commentary that Gold ETP's saw its fourth straight week of liquidation with 3.4 million ounces sold in February. They note that precious metals investors are rotating into cyclically-lined assets as better economic data has "spurred optimism".
On the daily 10-year yield chart, I'm looking at what appears to be a head and shoulders pattern forming as the trend line from the Dec. FOMC meeting was broken last Monday. I would think that the right shoulder needs some more time to work itself out before following through to about the 200dma.
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For the most part, it looks more and more like an overseas correction is underway as US equities stay stubbornly high. Looking at market internals, the strength in Consumer Staples and Utilities is quite striking, and inconsistent with bullishness.
I continue to maintain that this is a high-risk environment given behavior which more and more indicates we are in the midst of some kind of deflation pulse. When disconnects are as wide as they currently are, it tends to signal a major trend reversal is about to take place.
Our inflation rotation models continue to be highly defensive here. With the breakdown in China, I suspect in general that the cyclical trade will continue to hemorrhage, and eventually filter through here.
NQ (NDX futures) bumping up against the mid-trendline (chart), managing to rally even with the complete devastation in Apple (NASDAQ:AAPL). That stock looks like it is on the verge of capitulating, but not holding $422 at the close opens up the door to the 385 area.
What is troubling now is that open interest put/call stands at 0.61, hardly indicative of too many shorts on board. I wanted it at 422, but below that, I might exercise more patience.
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Tuesday, March 5, 2013
Has Apple Put in a Bottom
Let's notice that Apple (NASDAQ:AAPL) made a new low yesterday at 418.32 that positioned the price structure beneath its most recent down-leg channel.
When the sellers saw there was no downside follow-through beneath the lower channel support line, AAPL reversed back above the lower boundary line.
AAPL has since climbed nearly across the entire channel width towards the upper channel lines, now 436-440.
As of this moment, my work argues for this recovery rally to peak right near the upper channel boundary, and thereafter for AAPL to reverse into a decline that could retest the 424-419 turn around.
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Looking to Add Equity Risk but are Afraid at These Levels? Look to Copper and the Commodity Unwind
What we are seeing in the commodity complex is the drip, drip, drip of orderly liquidation. Commodity funds are losing assets and/or being shut down. Tourists who ventured into commodities to protect against macro fears that didn't materialize have started to sell. And the sell-side commodity hype machine is now behind us. This is why commodities have stayed so oversold for so long with high negative sentiment readings, yet still go down pretty much every day.
When performance is dragging, less experienced traders often lock in profits on their winners and double down on laggards. The pros, however, prune their losers, and pros are the big holders of commodities. Hence, the drip, drip, drip. (NB: liquidations usually start with drip, drip, drip and end with flush.)
How far does the unwind have to go? These things are always hard to say with precision. But what we do know is that the commodity unwind should be a function of the size of the build-up-plus a reverse-bubble psychological dynamic once the selling gets going. Rapid rate of change influences emotion much more than level.
Since I believe the buildup was significant, with a good portion of it predating QE, I expect the unwind to be large and sustained. But, ultimately, every investor/trader has to come to his/her own determination of how big the unwind will be.
Do you think the US has put crisis behind it? This is really the only question you have to consider when you look at the above chart of gold since 2000.
What we have been seeing is that silver and gold are developing an increasingly negative correlation with the S&P. And it is in the precious metals where most of the tourist dollars reside. So hedging your equity longs with silver and gold-though it has worked very well for the past few months-will become more painful to hold onto in countertrend days, and possibly brutal in a selloff (both your longs and shorts may well move against you). It you have a cast-iron stomach, you should be fine. The reality is, however, that most of us don't-and hanging on to a winning trend is the single hardest skill to learn in investing. A better hedge will help you do that.
Enter copper. During the speculative run on commodities, there was a lot of broad allocation to the asset class as well. This means copper (and to a lesser extent oil) will correlate in part to precious metals, and in part to the S&P, since, as an industrial metal it is more sensitive to growth. The bottom line: copper right now makes for a better macro hedge than silver or gold.
The point of this is that if you have been suffering from being underinvested and you are looking for a way to add stock risk to your book, a really solid way to do it that minimizes the risk of being the goat in two months' time is to buy the stock you like based on your process, and hedge the beta out by shorting copper. It sensitivity to growth should make it go down on down equity days, but on up days it should lag-or even outright decline-based on the drip, drip, drip of the commodity unwind.
Here's the chart of copper of the same time horizon, FWIW:
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Wednesday, March 6, 2013
Greetings from MVHQ, where I'm settling in after a crack-of-dawn interview with twin-daddy Aaron Task and the Yahoo Finance crew. The question on everyone's lips is: The Dow is at all-time highs--can it continue? The answer, of course, is it can continue; the real question is: for how long?
Yesterday, in Will the Bull Breakout Last?, we shared two charts that sorta sum up our forward equation.
The first, a snapshot of tech, couldn't be more bullish; after basing for this entire calendar-year, the tech sector finally broke out with authority yesterday, turning NDX 2750 from resistance to new-found support. And this is despite Apple (NASDAQ:AAPL) trading 40% lower than it was in September. How about that.
The second chart--the other side, if you will--is a longer-term chart of the S&P, which is quickly approaching the vaunted "Triple Lindy." Only time will tell if the decade-plus long trend of investors getting punished at tops and savers being screwed at bottoms will continue but as Mark Twain famously said, "History doesn't always repeat but it often rhymes."
I will say that entering the session flat provides an entirely different perspective than walking in with big risk on (either way). A while back, I penned 12 Cognitive Biases that Endanger Investors and I would be lying if I said I'm not prone to a few of those internal vibes. That's OK; it's entirely natural, at least for those of us who drive the 30% of daily trading volume still controlled by humans.
Look for a fade (lower) attempt out of the gate before a truer tenor emerges at the 10:00 EST hour. The financials (BKX 44), our levels, Europe, market internals and commodities will all play a role as forward tells. S&P (INDEXSP:.INX) 1530-1580 and NDX (INDEXNASDAQ:NDX) 2750-2880 (2012 highs) are the new stair-step risk parameters; Mr. Valentine has set the price.
Good luck today.
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A Major Metals Bottom Is in the Making
Torture, yes, I know. This has been a test of will far more severe and prolonged than I anticipated. The long liquidation by speculators continues by the session, and the shorts keep piling up. Sentiment could not be worse in the metals pits. Of course I am confused. How do equities ramp daily, bonds remain firm, but somehow everyone in metals land thinks the FED is going to end QE4 prematurely? This FED? Let me give you a statistic. Gold was 1730 when QE4 (the printing of 45B/month, open) was announced. At 1568, we are now worried about this active program coming to a halt. It just doesn't make any sense.
Sense is always lost at bottoms. That's just the way the world works. Forget RSI's for the moment. It's really all about the COT report. Big banks have covered their short position for months now in gold. In the last two weeks we have finally seen the big commercial silver shorts haul their position in. We saw hedge funds liquidate and take their short position to a record level (by a country mile) and the last two reports showed the little guy jumping on the bandwagon with the net long position held by the retail sector literally collapsing over the period. None of this data, mind you, included the last 6 days of consistent negative action during the high volume NY session. The only reason the price is essentially unchanged is because the Japanese buy the stuff every night, giving it enough cushion to sell off and hover around neutral/slightly down.
There is one rule I have embraced since I began on my journey as a trader 17 years ago. No, I will not allow my son to do this for a living! The one thing I have held to my heart is that the people always get it wrong in the end. Good traders are ahead of the curve in evaluating people's expectations and bad ones, ones that are no longer in business, join the herd at the end. You must always respect the herd's ability to move something contrary to fundamentals. It's really all about understanding market psychology. This is nothing new to you Minyans, but it bears repeating. Anyhow, my strong feeling is that the herd is in the late stages of getting this one very wrong. One thing is for sure-a pile up of this negativity is likely to be unwound in a very powerful, steady, and ultimately frenzied panic (which then will likely also be "wrong") because that's what the herd does.
Apple Losing Market Share?
So Apple (NASDAQ:AAPL) is losing share?? Check it as truth is revealed. Also, many analyst cuts of late. Say it with me -- "Bottom Tick". And I've seen some fine downgrades with sound logic, but the Berenberg downgrade is complete rubbish. Total focus on phones, total absence of software, total denial of AppStore/iTunes, no mention of cash or balance sheet strength and thus totally devoid of logic. The thin thread of logic seems to surround comparing the old "pre-smartphone" cell market with the new market. Simply put, there are so many differences today -- too much complexity, speed of innovation, platform wars, content innovation and too much daily use and reliance on mobility devices that the comparison is fatally flawed.
Thursday, March 7, 2013
I'm dumping my long Dell (NASDAQ:DELL) options position at the open. Icahn may have the juice to keep the stock running higher, but I'm less than two weeks from expiration, and with the stock up 5% above the $13.65/share bid, it's pricing in a something that could turn out to be nothing.
Additionally, big-time bear Jim Chanos announced on CNBC that he's shorting Dell, and who knows what effect that could have on the stock? It's entirely possible that a very ugly bear case comes out publicly that makes the stock look overvalued at the $13.65 acquisition price, let alone the $20+ valuations some folks are placing on the company.
At the very least, I think it makes sense to take some profits in Dell here, though in the interest of fair disclosure, I'll be dumping my whole position at the open to lock in the gains.
Playing in the Miners
If you are interested in short term trades, here is an idea for you. The Gold Miners ETF (NYSEARCA:GDX) seem to have put in a reversal from deeply oversold. Who knows how far it can bounce, but we can always play! First Majestic Silver (NYSE:AG) is a nice silver miner play that can catch a bid up to the 50 day from beneath. As I write this it is at 16.48, but could see 18+ within a week. Downside stops can be placed around 16 for a 3:1 risk versus reward trade. Nothing fancy, but this type of catchup play can add Alpha toward the end of a bull run. Watch the 17 area for a possible stall, but if we get through there, then a test of the 50 day moving average seems like a logical play.
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March 6-9 is a Fibonacci fractal 1440 degrees from the 2009 low.
It is interesting that the DJIA (INDEXDJX:.DJI) is flirting with a fractal 14,400.
This coincides with the top of two rising channels and a Live Angle from the beginning of the year as shown in a chart from this morning's Daily Market Report.
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Friday, March 8, 2013
NFP Instant Reaction
The numbers look very good.
The headline number of 236K is good. Private was even a bit better. Downward revisions to last month seem high (the headline all the way back to 119 from the original 157 seems big, but the quality of the data is apparently abysmal).
The unemployment rate dropped nicely, and with 170k jobs added in the household survey, it was jobs not people leaving the labor force that pushed it low.
All good, right?
Apparently not. Stock futures are up a little more than they were before the number. On the CDS side, IG19 isn't back to tights from earlier this morning.
Given the initial reaction, I think we see consolidation.
Stocks are showing every indication that they are being driven by QE and the slightest fear that QE might be removed limits their upside. I do not like stocks here and actually think we can close down on the day. That seems insane when we finally get a headline job number that is good, but this market is far from normal.
I think the CDS outperformance here can gain momentum. The roll is less than two weeks away. Curves are steep. The pace of LBO's is slow. Money is coming back into HY funds. Loan funds and CLO's continue to see inflows. Even the stress test is something I think that favors CDS, for banks in particular.
Treasuries are selling off initially but I think this is a buying opportunity.
The Fed will be buying longer bonds on the 11th, 12th, and 13th next week.
Short Santa for a Trade
It's beginning to look a lot like Christmas -- or, that's the sense I get when I look out the window at the winter wonderland. Does that mean Santa is on his way? Yes; on his way out...
An old adage is that markets bottom on bad news and top on good news; today's NFP was great news (if you believe the numbers), and that adds an element of doubt to the upside rout.
Please note Goldman (NYSE:GS), JP Morgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) trading lower out of the gate. We know that THE line in the upside sand for the S&P is up at 1580 but I couldn't help but fade (read: short) the opening gap for a quick fade trade.
I'll be back.
I think the big upside reversal in Gold/GLD (NYSEARCA:GLD) this morning from a gap down open despite substantial strength in the dollar speaks to the idea of the notion that this is a test of a possible February 20 selling climax.
See daily GLD for year with volume here:
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