Buzz on the Street: Just When We Thought We Were Out, the Fiscal Cliff Pulls Us Back In
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, December 17, 2012
The Boehner Rally?
I'm pretty amazed that no one has yet to call this the "Boehner Rally" so I figure now's the time to do that. News over the weekend on Fiscal Cliff negotiations is pushing US markets higher, while most international ADR stocks are not participating. This is somewhat to be expected given how well those ADRs on average performed last week.
It appears that a short-term period of outperformance in the US may be underway with the Fiscal Cliff as the catalyst. The bond sell off appears to be very early in the making, and it is good to see Financials (NYSEARCA:XLF) performing nicely. The yield curve appears to be in the early stages of steepening as inflation and growth expectations return to the markets. I know many are tempted to bet against bonds by being short them, but I maintain that the best way to play rising rates is to bet on rising equities. After all, it is still one of the most unloved areas of the investable landscape, and is begging for attention for retail money.
Between the Ticks
The S&P (INDEXSP:.INX) ran up to the key 1421/1422 level, key because it is 1 full rev of 360 degrees in price down from the high 5 years ago.
If it can recapture and convert this level with authority and follow-through this week, bullish December seasonality should kick in on the heels of a potentially bullish 3rd higher lows on the dailies since the November low.
In addition, this last pullback sets up from a test of a Bowtie of the 20/50 dma's
See S&P daily from November to current with 20 and 50 dma's:
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Bank Index saying "Cliff, What Cliff?"
Banks seem to be climbing the "cliff" of worry. Are they sending a message to investors that everything is okay? Or is this breakout part of a larger backtest that is destined to fail?
Watch the action over the remainder of the week. Follow through will be key and would go a long ways to boosting the broader market. See chart of Bank Index (^BKX) below.
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Tuesday, December 18, 2012
Extreme Social Moods
I suspect we may be in the early stages of a major chase into risk assets in the next two weeks on Fiscal Cliff progress, and the very real yield-curve steepening that is happening in the bond market. This market has been like a coiled spring, and could have a shocking move to the upside when most least expect it.
As I noted in my latest Lead-Lag Report, market internals broadly look bullish, and Financials (NYSEARCA:XLF) appear to be breaking out. A very sudden realization by money is taking place: the surest way to lose money all year was to bet on the negative narrative.
The reevaluation of thoughts relative to price will eventually make traders cave and chase the move. Forget the Fiscal Cliff Countdown - focus on the countdown to new all time highs as I said on CNBC yesterday.
Apple Buzz Poll Feedback and Some Meta-Analysis
Yesterday, after Apple (NASDAQ:AAPL) broke the $500 mark, we held an informal poll of Buzz readers asking what they thought of the stock.
The results were interesting. About 3/4 of respondents were bullish, with the remainder being cautious, but not outright bearish. I suspected that the results would lean more negative.
Thanks to all that responded!
Speaking of which, I wonder if the mere fact that we decided to put out such a poll, as well as this article surveying Minyanville contributors -- on a day the stock was the recipient of a Citi downgrade and multiple target price cuts -- says anything about a potential near-term bottoming process.
And what does me phrasing it so gingerly --'potential near-term bottoming process' -- say about... a potenial near-term bottoming process?
I know that you know that I know that you know indeed...
Oh well, I didn't feel the need to stop and take a look around at $700 or $600, but at $500, I really felt an urge to call a big time out to reassess where the stock may be going. So I guess, the sudden worry could be considered somewhat bullish.
'Somewhat' bullish -- there I go again.
Decon and DeMark
There are many fundamental reasons to get long Devon Energy (NYSE:DVN) at current prices, but I'll leave it to the analysts and their droves of helpers to lay those out. I'll simply offer one of the most compelling DeMark setups I've run across in a long while.
On a daily basis: stock printed a Countdown 13 Buy yesterday with a "risk level" (i.e. stop) a tight $3 away at $50.28. The "price flip" needed to confirm the Countdown Buy will happen on a close above $52.91.
On a weekly basis: Countdown 13 Buy completed 4 weeks ago. If the stock closes Friday above $53.23 it will mark a "price flip"; if it closes below, it will complete another TDST Buy Setup (Note: this would not be a clean 9-13-9 because the Countdown and Setup Buy overlap). "Risk level" on the weekly is at $49.45.
Also, on the weekly time frame, a "price flip" would confirm a TD Megaphone 7 Buy signal, which on long time frames (weekly or higher) has served me very well to mark "MAJOR" tops and bottoms, even if they lead to long term consolidations before the start of primary moves in the opposite direction.
It is not often that these type of technicals line up on a high-quality large cap. I'm long the stock and plan to add if/when the above confirmatory signals trigger.
Wednesday, December 19, 2012
S&P 1435 and NDX 2700. We've been talking about them for a while as they matter (through a technical lens) in a big way (for the "why," click here). With that said, and as snazzy as those patterns will look should we push through and hold those levels, respect -- but never defer -- to the price action.
I was informed last night that I was "borderline disingenuous" for not mentioning "Turnaround Tuesday" yesterday. "You can't talk about it when it works and ignore it when it doesn't," or so I was told. 1000 pardons sir; I had more important things on my mind.
Gold was the fly in the upside try yesterday; only time will tell if that predictive prowess will play through to the downside today.
While the stock market was--or appears to be--the big winner in 2012, hedge funds may well be the biggest loser. Not in terms of net performance; I'm talking about them being an acceptable casualty in The War on Capitalism, both in the eyes of the government and through the lens of John Q. Public.
Watch the banks; they are the tell with the best smell. BKX 47-52 are the levels of lore and yes, you could drive a truck through that channel, per the chart below.
I have a flag on my property, which is odd because it's not something that I would have put there (being honest) but now that it's there, I've embraced the responsibility. It is flying at half-mast for 26 days for reasons that should be obvious to us all. Continued peace and prayers to those suffering in the wake of the recent tragedy, and let's keep this "other" stuff in perspective as we continue to find our way.
As always, I hope this finds you well.
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Those Crazy Mayans!
So the world ends Friday, but what does the S&P 500 (INDEXSP:.INX) do before then? I see three possible paths, but my primary chart is below.
1) Preferred: The S&P 500 continues up today with a gap up or a drift up. If it gaps up into the sell zone (1450-1455) then It's a fade today. If it starts below there, I will wait for all the way to 1455 or end of day, whatever comes first. Failure here would give us a nice shot at retesting the breakout area around 1425-1430ish. This is a time specific trade, so it needs to start the failure process today or tomorrow. After the 1430 test we should get a straight shot to infinity and beyond! The old highs around 1470ish and beyond. A nice tradeable zig zag, in my opinion.
2) Secondary: The S&P 500 doesn't get to the 1450 area and falls sharply. This will likely be bought by all the people that are still complaining about missing the last two days. Likely supported above the breakout zone from about 1437-1440. If this happens we likely take out some of the steam and this can open the door to failure at the 1470 area.
3) The Mayan Trade: We break 1428 on a gap down, the Flash Crash ain't got nothing on the Mayans, we go straight to S&P 666 and the only thing that rises from there is Phillip Morris (NYSE:PM), Monsanto (NYSE:MON), and Disney (NYSE:DIS). Because I hear the Mayans like Mickey Mouse.
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To Be Trusted?
Big breakout on modest advance decline, so some suspicion is definitely warranted. On ES, next level of resistance is the naked VPOC (volume point of control) for the pit session of 10/19 at 1446.75 (March contract). Currently at 1445.50. Key level.
Expecting an op-ex Wednesday pullback, levels below are 1436 and 1432.75. Any move below 1432.75 would probably end this rally. 6E (EUR/USD futures) tagged 1.3303, one year VAH (value area high) a big level of resistance. Getting a bit frothy, especially with equity put to call collapsing yesterday to 0.51. The herd is all in.
Thursday, December 20, 2012
The Good, the Bad, and the Funky!
The Good: Banks. Sticky. Green. The market will not break if this sector only bends; this is the most constructive action I see on the early screens.
The Bad: Gold. Lower. Remember what we've together learned: Gold (NYSE:GLD) was the fly in Tuesday's upside try ; only time will tell if that predictive prowess will play through as it did on December 13. I've updated the chart of the S&P vs. the CRB below as commodity volatility typically precedes equity movement.
The most vilified rap of all time!: Watch Intercontinental Exchange (NYSE:ICE) -- not the Vanilla kind, the stock kind! If it melts, it'll be a tell; if it stays frozen in and around here (work with me on the metaphors people), it will matter on the margin.
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Herbalife (NYSE:HLF) was a short swing pick in Tuesday night's Daily Market Report for two reasons.
There was no setup per se; however, the persistent selling pressure over the last few days in the face of a market rallying strongly spoke volumes and suggested that the large range Bottoming Tail in November was on the verge of being snapped. The price action was "unnatural" and suggested someone, somewhere knew something
Prior signal bars, offset, often times lead to sharp moves.
See the daily HLF chart from the report here:
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There Are No Bad Bonds, Just Bad Prices: Example #2,895
Fitch came out with a report yesterday on the issue of whether or not there is a bond bubble. This topic has been a subject of much debate over the past few years in the wake of the credit crunch, so I wanted to weigh in here on the subject and highlight some things folks need to keep in mind.
First, when talking about bonds, you need to make the distinction between credit risk and interest rate risk. Both risks ultimately become entwined in one number: the price of the bond. But for the sake of analyzing the market now, you need to keep them separate.
Why? Let's look at what Fitch's analysis uncovers. First, as the chart shows, if we see yields for 10 year BBB rated corporate bonds rise 200bps, that translates into a 15% decline in market value. If we were in a higher rate environment, the decline wouldn't be as steep as higher coupon rates are the best defense against duration and convexity risks. But we have to play the market we're given, not the one we wish we had.
So, besides a lower price for a bond, what does that mean for the bond itself? Well, it depends on the company. What that doesn't mean uniformly is that the company is any worse as a credit risk. To see how the credit risk plays out for such a company, you'd need to see how that increase in interest rates plays out on its balance sheet and income statement. That takes time. You could devise a stress of a company's balance sheet and income statement that uses assumptions like "a 200bp increase in rates will drive the company's cost of debt from x% to x+2% and revenues will fall 5 or 6%." Still, that's not something that gets accurately reflected in a stock or bond price after one day.
The real issue is, as Fitch pointed out, is the possibility of taking a mark to market loss for perfectly performing debt due to the decline in market value. So we're back to the question of how the value of an asset is recognized: is the mark during a forced liquidation relevant or not? I'd say it depends on how one chooses to recognize revenue. If you recognize mark to market gains, you have to recognize the losses that come with it as well.
So as to the question of whether or not we're in a bond bubble, I'd say it depends on what outcome you're worried about. If you're talking about a massive wave of corporate defaults, I think the chances of that occurring (i.e. a "real economy" issue) are pretty small. But the risk of a "market/financial economy" issue resulting from a drop in price/liquidity for corporate bonds is very real. Risk/return here is not good.
And at that point, the real issue isn't the loss in asset value. It's the time you lost by keeping money parked in an asset with bad risk/return traits.
Friday, December 21, 2012
The Minyan-Mayan Switcheroo
As Mayans cheer from the sidelines, I awoke this morning to find horrific weather chewing through the east coast. Wind, rain, locusts, vermin, frogs...oh wait, those were the plagues of Egypt.
The Mayan Prophecy, according to the 5125-year-long cycle in the Mesoamerican Long Count calendar, suggests that a cataclysmic or transformative event will transpire at 12:21:21 PM this afternoon. I hope you have your galoshes in hand; as Richie from the Wanderers once learned, you don't mess with the Mayans!
Perhaps that's what the Republicans had in mind when they suddenly scrapped their vote to arrive at an amicable resolution that would avoid the Fiscal Cliff. "We're expecting highs in the 1250's today," said one GOP'r, referring to the weather chart below rather than the S&P, "We're stopped out either way!"
And yes, it takes two to tango; that wasn't a political statement, but rather a statement on politics.
In our discussions yesterday, we offered that the bears were licking their chops as everyone got bullish for they knew that the bar of expectation for a Fiscal Cliff resolution was getting higher and higher while the commonality of interests on the Beltway--and the direction of social mood--was moving in the opposite direction."
Another reason I didn't climb aboard the Bovine Express--despite how well the tape acted around our twin levels of S&P 1435 and NDX 2700 -- was following observation: The path of maximum frustration often arrives when something seems so obviou; it can set the dreaded "off-sides" trap."
Indeed, while this crimson wind could blow over by 12:21:21 PM, my risk-profile has been constant for the last week or so: Long situations and short S&P (small) through February out-of-the-money puts. It was house money when it was going against me and it's hous money now; meaning, the lion's share of my risk has already been stuffed into a stocking somewhere.
A few points of note before I scoot my bonus son to the doctor (he was our only child yet to get sick). I'm not complaining for obvious reasons--let's call it the Newtown Perspective--but we must tend to his health nonetheless.
Europe is bending but has yet to break.
Gold; we flagged the weakness on Wednesday as a potential precursor to an equity move lower, which has arrived on cue this morning.
Good luck today; I'll be back in the saddle on the other side of the opening bell.
The tribes have spoken and it looks like all of us are getting kicked off the island, the big one between the Atlantic and Pacific. If the House can't pass Plan B, then it's obvious we are going off the fiscal cliff. The market, of course, has not helped by whistling past the cliff. The market did a good job back when TARP needed to be passed and the debt ceiling problem had to be resolved in 2011. It blew this one.
America has a tribal problem. The problem is different than the type of tribal conflicts in Syria and Libya because it's not blood or geographically related, but we have two tribes and they are proving it this week.
I don't understand why a Republican or Democrat elected in Maine to represent issues that are important to Maine, as soon as he or she arrives in DC, has to become part of their party's voting block with others from Arizona or Alaska where people have different priorities than Maine. Once you're in Washington, you can't think on your own, vote on your own, or work with the other side, because you just joined a tribe, and tribes don't like other tribes by definition.
The reason we have a fiscal cliff is because Washington has become tribal. To members of Congress, your tribe is more important than your country. It used to be true that people regarded a stalemated Washington as a good thing, but this time the fiscal cliff was supposed to force action, late as usual, but a solution was expected in the lame duck session of Congress.
Is there anything people can do to breakup these two tribes? The contempt for Congress is readily seen in the low approval ratings, but most people seem to think their own representative is OK. Thus, even though we should have voted them all out, we didn't. That famous Pogo quote: "We have met the enemy… and he is us" seems very appropriate.
The tribes have spoken, but the only thing that can smack these Washington morons over the head with a two-by-four is the Dow down a couple thousand points. The futures as I am writing this Thursday night are starting to send a message, but the pain will have to be big to wake up the morons.
This will not be a good way to end the year.
My End of Year Naughty/Nice Macro List
Ok, ok, that's a bit of a misnomer. If I was going to be playing Saint Nick in the world of macroeconomics, I wouldn't have a list of who's been "Naughty" or "Nice." I'd have one big list labeled "Meh." Because it's all meh. Allow me to explain.
Let's look at GDP. While 3Q was revised higher due to increases in net exports (we imported less) and a bump up in PCE (we spent more), everything is still largely the same as it ever was, despite what some others are saying about the possibility of "above trend growth." The average GDP growth rate since 4Q'09 is 2.3% and in the 4th quarter of '09 as well as last year, real GDP grew at a 4% annual rate. The point is that in this environment, it doesn't do you any good to get fired up over any one number at any given time. Anyone who does that is just pandering for page views.
The real positive in the GDP data is that the state and local governments are finally starting to spend more. The contraction in states and municipalities was especially hard. I've included this chart from the BEA's data to show this. It's a rather noisy chart, but the red line reflects the spending of government and it had been persistently negative until now. The green line represents investment, of which, residential real estate construction is a component. Investment as a component of GDP is too volatile to hang your hat on for a meaningful recovery and this chart proves that. So again, anyone hyperventilating over it is just pandering.
On the labor front, jobless claims continue to drift under 400,000 and unemployment continues to drift lower. But the pace is so slow we might see the polar ice caps melt before unemployment gets to the levels the Fed is targeting. Of course, with all the discussion of robots and the disruptive nature of technology, I think we need to be asking ourselves a different question: if labor is not going to be the input it once was, and if we can truly automate a great deal more work now than ever before, why are we still talking about personal income tax rates in this fiscal cliff nonsense? Whether we get to that magical, mystical land of Keynes' 15 hour workweek is anyone's guess, but we have to recognize that the world of work is changing and our tax code needs to change with it.
As for Europe, it's still largely meh, but more dire. The Economist Intelligence Unit came out with its 2013 forecast and at the top of the list of scenarios was a Euro break-up. Funny that we have that as a scenario as Greece gets an upgrade from S&P and Greek debt can be pledged again at the ECB, but I think they're right. Because even with Greece on the mend, and Italy and Spain still not seeking a bailout, negative social mood has set in. There's talk of secession in parts of Spain and while Greece is back on the ECB's nice list, they went through hell to get there and some people may still be asking themselves if it was all worth it. And this is an election year in Germany. Who knows what will be said and how it will be interpreted all for the sake of German politics.
India and China continue to grow, but both are facing headwinds for very different reasons. For China, the question is whether or not they can continue to grow at the same rate as before in light of the resurgence of onshoring. India has grown rather rapidly as well, but that growth seems to be coming despite what they are doing as opposed to what they are doing. They have a government that many view as ineffective and while growth has been strong in India, it has fallen short of expectations. Heading into 2013, there is definitely some cause for concern for the I & C components of the BRICs.
So that's my macro view of the world right now as 2013. Everyone check your stockings, I'm leaving everyone candy canes made of 'Meh.'
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