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Should Traders Sit Out Apple's Earnings Report? 8 Noteworthy Stock Market Observations

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From tech stocks to the EU, there are many things investors need to watch as earnings season begins.

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The credit and derivatives world remains flat to better this morning, with the US CDS back below 40bps and the two-year swaps consistently under 13bps. Large US financials' CDS are basically flat, as are Italian and Spanish bonds and CDS. Yesterday's new bond issuance was, not surprisingly, de minimis. Various tidbits of interest on my screens:
  • It took less than a week after decapitating the center-right People of Freedom (or PDL) party for the Italian socialists in the Democratic Party (or PD) to demand a reinstatement of the IMU tax, the real estate tax on primary residences. It has been nearly 20 years since the pigs have been kept from the trough, and they are hungry; there's overwhelming hatred for the IMU; if the PD wants to change the victory handed to it by Il Palazzaccio ("The Bad Palace") into a defeat, forcing back the IMU is just the ticket. If you think that the EU matters, keep an eye on Italian metrics because after the "vote of confidence" honeymoon, things could heat up very quickly.
  • The 3-month volatility index curve was inverted pretty much all day yesterday. In my humble opinion, it's far more telling of fear than the VIX (INDEXCBOE:VIX) alone, and its inversion has indeed served well as a contrarian indicator (subscription to Buzz & Banter required).
  • I will be watching to see how SanDisk (NASDAQ:SNDK), Akamai (NASDAQ:AKAM), Qualcomm (NASDAQ:QCOM), F5 Networks (NASDAQ:FFIV), and a few other names I follow closely may react to earnings. (I am distinguishing between how the earnings/guidance may come out from how the stock may react to them.) But it is suffice to say that valuation may matter more this quarter than it has in a long while.
  • With Apple (NASDAQ:AAPL) having pre-announced its third-quarter results, the first post-earnings option series (the weeklies expiring November 1) sports a very muted implied volatility profile (low 30s vs. typical 40s by now). If that stays the same, calendar spreads and other strategies to play expensive near-term volatility versus the cheaper long date one aren't likely to work too well, which leaves traders with the much riskier alternatives of laying out directional bets. Sitting this report out may well be the best "trade" for me.
  • The S&P 500 (INDEXSP:.INX) future pit contract (SPA) shows a daily qualified Propulsion Exhaustion Down target of 1661.50; last night the contract closed below the 1669.70 TD Reference Close Down price. If we get a lower low, the odds that it tags Propulsion Exhaustion Down are pretty good.
  • I'm all for seeing both sides of a trade, but this bearish piece on Seeking Alpha concerning Gulfport Energy (NASDAQ:GPOR) borders on the bizarre. The premise is that GPOR is wildly overvalued because only 30% of its reserves are oil and the rest is natural gas. That revelation is akin to saying that water is wet. And from a value investor standpoint (which is what the writer purports to be), would you rather invest in reserves of a commodity that trades at depressed prices even though its consumption is growing exponentially, or in reserves of a commodity whose price seems to have attained a "new plateau of prosperity" even though its continued use is broadly vilified on a daily basis?
  • As I wrote on Buzz & Banter in real time, I closed out my Western Digital (NASDAQ:WDC) position a few weeks ago as it became more and more apparent that WDC is pushing hard to move into the solid-state drive (or SSD) space. That being said, some of the hard drives price points offered on various e-retailers' websites are screaming that the HD business -- or at least its margins-- is in a complete tailspin. I kind of doubt that SSDs can pick up the slack fast enough to save the next few quarters for WDC and Seagate (NASDAQ:STX).
  • There was a huge option trade in International Paper (NYSE:IP) yesterday, with a gorilla buying 15,000 Jan 45 calls and selling 59,000 Jan 50 calls. If this was a 1x4 ratio spread without a hedge for the excess calls -- considering the amount available out there for M&A -- putting on this trade may redefine picking up pennies in front of a bulldozer.
Happy trading to all!

Twitter: @FZucchi
Positions in SNDK, AKAM, QCOM, FFIV, AAPL, GPOR.
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