Buzz on the Street: Bulls Take a Beating on Euro Worries
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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Tuesday, May 29, 2012
The T Report: Where Have All the Cheerleaders Gone?
Stocks are rising in spite of a lack of cheerleading. Europe did very little last week at the summit and this time it seems most pundits took the time to notice that. The Bankia "rescue" is highlighting how bad the Spanish banking system is, given how much the country is going to need to spend on that mess. The crisis at the regional level in Spain has hit a point where all the debts will get passed up to the country level and the myth that guarantees don't matter has been shattered. No one is claiming this is a good thing, yet futures are up.
Greece, I am told, is likely to leave the Euro, yet the consequences to Greece and the EU will be devastating. I cannot remember another case where the outcome is universally held as disastrous for all parties, yet the outcome is deemed a foregone conclusion. Our own analysis projects that the risk to the EU from a Grexit is very high, but we believe that the risks are so obvious and real, that some agreement will be reached to buy enough time to untangle the mess a little before the actual exit.
Even good old JPMorgan (JPM) can't seem to do anything right. After weeks of being pounded on about the whale trade they are now being chastised about the unwind. A Reuters article seems to suggest that it is bad that it is selling the available for sale bonds held by the CIO office to offset the losses. Did they not read the transcript of the conference call? That AFS book is part of the CIO's office, and was part of the reason JPM initially entered into "hedge" trades. Expect JPM to unwind that book as they unwind the whale trade because the last thing they want is to have no "hedges" and a $200 billion book in the CIO office. Some of the abuse JPM has been taking has been deserved, but much has been over the top and suggesting that somehow it is almost nefarious that JPM is booking big profits as it unwinds this leg of the CIO's position shows just how far the pendulum has swung against the big banks.
Is there a lot to be excited about? No. Will we have a U.S. come in fade? Probably. Should you be short this market? Not just yet. The complete lack of cheerleading is a cause for concern for being short. Stocks were up last week, yet the commentary was bearish across the board and from the tone of most of what I hear and read, you would have thought it was another down week.
Economic data remains soft, but away from Europe not horrible, and even in Europe it is becoming a bit unclear just how much is priced in. Talks of stimulus in Asia helped that market. The ECB has done nothing so far this week, but I wouldn't rule them out, and the Fed has plenty of opportunity to try and talk up the market here with weak economic data, no signs of inflation (at least in the data the Fed focuses on) and with real pressure on bank credit spreads.
So I remain bullish here. Again, the May 11th prices are my target as I feel that everyone got too bearish after the JPM announcement on the 10th. Mere calm may be enough to get us there, but I can see easing and JPM as catalysts higher. Europe is a mess, but it has been for awhile, and if they can keep Bankia out of the headlines, that too might help enough. Also, being overlooked in the past two weeks is limited evidence that retail is pulling out of risky fixed income markets. Pro's may be selling high yield bonds, but at this stage, retail does not seem to be joining the flight, very different than 2011.
It's Turnaround Tuesday--of sorts--as traders, or those of us not enjoying the vacation week, power up for a fresh four-session set. On a personal note, I'll communicate that it's GREAT to be back in the 'Ville after a health scare that put me on my back for the better part of the last month. I tried to put my game face on last Monday and Tuesday but it was not to be--but after spending the Memorial Day holiday sleeping, resting and otherwise relaxing, I feel terrific, although I've been cautioned that it will take another month or so until I'm 100%. Hey, one step at a time is entirely more appealing than the alternative!
Some Random Thoughts, in no particular order:
We mapped a pretty accurate game plan from S&P 1400 to S&P 1300 (full disclosure: I covered my directional shorts around S&P 1340 as I was (unknowingly) about to go under the knife) and Minyans who followed that script would have been stopped out with the move back above S&P 1300.
We also touched on the notion of Euro Bonds before they got 'mainstream mainstream' and while I view them as a near-term "all clear" for the bulls (a notion I've posited before), lemme be clear that it's more of the same--drugs that mask the symptoms rather than medicine that cures the disease. I do believe we'll see some sorta joint debt relief but the logistics of passing Euro Bonds are such that it would take a genuine crisis (in terms of price) before something like that passes in seventeen sovereign legislative processes.
I did a lot of reading the last few weeks to keep my mind active. While much of it was market related, some of it was about positive energy, meaningful existences and the laws of attraction. And what did I re-learn during that stretch? Negative energy is wasted energy, and I've tried to morph any remnant resentment (in various personal and professional situations) into empathy, understanding and acceptance. I shared many of these thoughts on Twitter, which is likely a more appropriate venue for such musings.
I made a few IN-N-OUT trades while I was laid us, so to speak. The first was a Facebook (FB) flip on the day of the IPO, buying $38.01 stock (leaning against the syndicate bid) and flipping that out around $40.75 (better lucky than smart). While I mused that I would likely "put some away" in and around $38-$40, I've since softened on that position. I may trade it from the long side--there is a LOT of negative sentiment surrounding the stock, which I view as bullish--but it's just that, a trade.
I entered a very small (2%) short position through out-of-the-money puts in Google (GOOG) on Friday; if the monetization of mobile advertising is elephant in the room for Facebook, the masses would presumably connect the dots to Google soon enough. Once I spied the potentially bearish Head and Shoulders pattern in the stock (a trade through $590 to the downside "works" to $522 through a pure technical lens), I initiated my risk with a tight stop (above $605). See the chart below.
I also read a few articles surrounding Joe Weisenthal, the omnipresent deputy editor of Business Insider. I, like many in the social sphere, marvel at how prolific he is and I suppose that I can relate to both sides of the discussion as I toiled 20 hours per day while building the 'Ville. The first column was the NYT Magazine column and the second was a retort from a college professor explaining why his particular path is not the script to follow. I suppose I net out somewhere between genuine respect and new-found balance, as best demonstrated by this excellent article from the Harvard Business Review.
In terms of the tape, S&P 1300-1340 remains our stair-step range. I do believe housing is picking up (I bought and sold a home in the last six months--and have two weeks left in NYC!) and agree that there are other anecdotal signs of economic improvement. Where I struggle is two-fold; first, it took upwards of $13 trillion in stimulus to power us to 2.2% GDP (not so snazzy) and I believe Europe is slapping Band-Aids on broken bones. Once we get to a place of measuring apples vs. apples (sans synthetic economic steroids), I can make a long-term stand. Until then, I'm just trading, and doing so with learned patience.
As always, I hope this finds you well.
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Facebook Options Now Trading, And They Look Kinda Cheap
Attention volatility junkies -- Facebook (FB) options are now trading, with implied vol's are in the ~60% range and dropping (from the open, as of 9:47 a.m.).
This is actually cheaper than I would have expected given that this is a new issue, and one facing an awful lot of uncertainty regarding the future.
I would suspect these IV's increase substantially ahead of Facebook's first earnings report, which will come in a couple months.
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Wednesday, May 30, 2012
Spain in Pain
Spain is back in pain as the 10-year trades to 6.67%, a level which caused bailouts in Greece and Ireland. This type of action is better left for someone else to trade. The action is choppy and will be frustrating for many. I do not see many quality setups that are worth committing to here.
RIMM tagged single digits in the after hours and should now be on your radar for long-dated call options, as the company will likely be scooped up. AAPL looks to be forming a bullish inverse head and shoulder pattern that works itself back to its former topping area at $625.
If you are interested in playing, wait for $575 to close and confirm. I found an interesting piece of historical data over the weekend that I wanted to pass along. The monthly chart of Dow Jones Industrial Average has registered a bearish divergence at the 2011 and 2012 highs, making a higher high in price, while the RSI rolled over.
Going back to 1971 there have been 11 of these bearish signals and in each occurrence of a bearish monthly RSI divergence, a significant decline of at least 16% followed. There was only one top of significance that did not register this signal, and that occurred in 1973.
The GDX responded nicely to the Plus One/Minus Two buy setup noted earlier, and importantly, is doing so in the face of continuing pressure in the broad market
See 10 min GDX for last 3 days here:
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For US Bond bears, It's Becoming the "Land of Hope & Dreams
For those short, these targets are not going to make the next couple of points up feel any better, and based on the daily counts, we may well reach the 152 area, but paraphrasing "Land of Hope & Dreams" "Faith may be rewarded".
Thursday, May 31, 2012
Is It Too Late For King Dollar to Abdicate?
When the Dollar Index hit my 82.70 target Tuesday, I noted the consequences for currencies in my daily update:
"If these markets do not reverse their recent direction Wednesday, then their paces should accelerate sharply."
Currencies generally gapped open beyond Tuesday's extremes, and then trended even further throughout Wednesday. Closing at another extreme for a second consecutive session Thursday would confirm their trends remain very much intact.
They would become terribly vulnerable to extending sharply, and substantially, into and out of the weekend. Memories of October 1987 come to mind, as does James Baker's infamous quote regarding Dollar support ("…let it go").
If Thursday doesn't confirm Wednesday's break -- i.e. if the Dollar Index were to close lower, not higher -- then all asset classes would become vulnerable to reversing their recent trending. Can disaster be averted? It usually is. But look out below if this one is not.
Chicken or the Egg?
Not to belabor the points from my "The European Elephant in the Room" article from yesterday, but I am afraid policymakers continue to have cause and effect backwards.
This morning ECB head Mario Draghi offered, "The financial crisis has heightened risk aversion in a dramatic way."
If only he and others would consider the opposite causation - that a dramatic drop in confidence has heightened risk aversion in a dramatic way and caused the financial crisis.
Yields Break Down
The break of Ten Year Yield (TNX) 1.7% was brutal in Tuesday's overnight session. A phenomenal amount of stops were hit as Ten Year Note Futures (ZN) relentlessly plowed through them, barely pausing. One look at the TNX chart makes one wonder why anyone was bullish on equities in March. The warning signs were there, clean double top at 2.4%, and a drive lower while equities and a plethora of giddy pundits proclaimed the birth of a new bull. Well, we were not fooled.
How far down can these yields go? Using basic fib projections from that range (1.7/2.4), we get a minimum move to 1.53%, 23.6% followed by a hair raising 1.42 % (38.2%). If you think that is fantasy, take a look at the German bund, trading at 1.24% and the red flag for the past 2 weeks. That said, we are due for a retest of the breakdown, i.e. a move back up to 1.69/1.7% at some point. To recap, the minimum target on this break is around 1.53%, be careful reading too much into any pullback in treasuries until we get close to that level.
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Friday, June 1, 2012
In life you need either inspiration or desperation.
For the last two weeks, the market has ended Friday quite weak and after a weekend with no European implosion, enjoyed an immediate relief bounce on Monday.
Today could turn out to be the second 90% downside volume day (assuming a close near lows), after the first one on 5/30. As I have shared previously, this entire decline has been quite contained. Today the catalyst for the decline is the jobs report, but the way I look at it, any other catalyst would have pushed the market out of its very measured decline! Now the market seems to be in the process of changing that selling pattern, which is actually constructive. Serious, capitulatory selling is an important ingredient toward sustainable lows.
My trading stance/Buzz theme has been the same throughout the past month. Small trades with primary focus on capital preservation and it continues to be so. The reason is that the markets are more governed by behavioral psychology than numbers at certain points and crowds are not rational.
Crowd psychology focuses on the irrationality of crowds. At certain junctures in the life of individual stocks and markets, crowd psychology takes over. The recent surge in selling is evidence of that. After bleak news that is bound to permeate the media this coming weekend, we might see further evidence of this irrationality and change the market pattern leading to a weak close today and a weak open on Monday.
That is when oversold conditions will begin to matter.
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Why the Bears Are Saving the Bulls
Michael A. Gayed
Jobs number? Awful. Bond market? Panic. Stock market? Saved?
Treasury yields are now at all time lows, with the 30 year within spitting distance of the level last hit in mid-December of 2008 post-Lehman. Last I checked, there has been no Lehman event. The bond market has behaved as if an event has already taken place. The set up is almost exactly like that of the end of September when I began arguing that a "Fall Melt-Up" was likely. If you looked purely at yields and the speed of the collapse, you would think stocks actually are down significantly more than they are. Yet, in the U.S., they are still clinging on to gains for the year.
My point? The bond market has acted like a stock crash has already passed. What if the bond market is wrong? I maintain my belief that the odds favor a significant run up in equities, and while our ATAC models used for managing client accounts remains positioned in bonds, I am beyond excited over the next flip back into stocks. The stock market, acting as Rocky Balboa, keeps taking the hits, but has not been knocked down. Will the bond market get tired of saying the same message, and begin to question its own thesis about the future? Or will the Spring Switch never get flipped, as the lights go out forever?
Wild wild times…
What If 1275 Breaks?
For all intents and purposes, the S&P has satisfied a 360 degree sell off from this year's high in 60 days.
1275 is one rev of 360 degrees down from 1422.
However, what if 1275 breaks with conviction?
We could get a cascade of another 360 degrees quickly -- that equates to 1136.
There is a lot of vibration there.
1131 is the monthly closing low for 2011.
1121 is the mid-point of the entire bull/bear move from the 1576 high in 2007 to the 666 low in 2009.
I don't know if using the 50 and 200 MONTH m.a.'s makes a lot of sense but it is curious that the 50 month m.a. ties to 1151 and the 200 month m.a. ties to 1141 currently.
So there is quite the cluster around those levels.
See monthly S&P from 2007 to current here with 50 and 200 month m.a.'s
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