Buzz on the Street: Tread Carefully Into New Year
Some of this week's most insightful and timely vibes.
Note: Some links may require Buzz subscriptions.
Monday, December 28, 2009
Well, you don't need me to tell you volatility is extremely low right now, at least relative to the last 16 month's or so. But is it time for the Dispersion Trade? By that I refer to the trade where you buy options gamma in individual names vs. shorting it in index names. You win if your individual names more around enough and with relatively low correlation such that the index does not move quite as much. Of course few outside a trading desk has either the time or capital to put on too many names in this fashion, so it's more a concept than anything else. And the concept is more or less net owning options in individual stocks and net selling them in indices.
Take this Mastercard (MA) here. Up top we have 30 Day Implied volatility (in yellow) over the past 6 month's. Sometimes names making new highs like MA lately will see volatility start to perk up a bit. Not Mastercard, it's getting cheaper and cheaper. And tough to argue as you can see the realized volatility in the stock itself is falling off a cliff as evidenced by 30 day HV on the upper graph and 10 day HV in the lower one.
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Nothing here says you want to net own options in a vacuum.
I'm not a big proponent of bottom fishing options volatility, and this MA chart shows exactly why, Even if right here, right now becomes THE low in in options volatility, you may still lose money if you become a net buyer. You won't be able to make up your daily decay in MA options until realized volatility catches up with implied volatility, and it's tough to time if/when that happens.
But what if we compare MA to SPY? I have these same 2 charts for SPY at the bottom of the post, and as you can see, it's pretty identical. Implied volatility at lows, but still considerably higher than realized volatility.
So what does this say for "dispersion"?
Well, my anecdotal experience says that you tend to win if volatility picks up, even though ostensibly is a volatility neutral play. Remember, you're selling options in one spot and net buying presumably similar dollar amounts in a host of others. For whatever reason, the pickup in volatility translates better to individual names.
Again though, it's impractical and too capital intensive to trade many names this way. So let's summarize it as such. Virtually every option in America is cheap relative to recent options pricing, but expensive relative to realized volatility. If you have a notion to buy options, I'd stick to individual names. If you prefer shorting, do in an index or index-based ETF.
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Tuesday, December 29, 2009
I was asked about my thoughts on the Vanguard REIT ETF (VNQ). The top holdings for this ETF are Simon Properties Group (SPG), Vornado Realty Trust (VNO), Public Storage (PSA), and Boston Properties Group (BXP) -- some of the most hated names during the heart of the crisis.
These stocks have rallied hard off the March lows, frustrating bears every step of the way. They claim the fundamentals don't support the action, which seems true. One can cite a handful of stats as proof of how ugly the bigger US picture looks.
But some of the smarter credit market guys I follow have been pounding the table since the Summer about all of the hot money floating around. Companies are coming to the market with large bond offerings we typically wouldn't see in a "normal" environment. Simply put, the demand and risk appetite is out there, and that's why these stocks have rallied (it has little to do with the fundamentals).
Now let's take a look at the chart of VNQ. The stock recently broke out above its September highs (near $44) and so far it does look like it wants to retrace back to that level. This is also the 20 day moving average, a very common first level of support. So my preference would be to remain patient and watch the behavior at that level. A bounce would suggest the uptrend is in tact. But also I wouldn't want to short the stock should that level not hold as you can see, there were a number of bear traps along the way.
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"Potash lowers U.S. granular potash list price by 14%, says Soleil - Yesterday, Potash lowered its U.S. granular potash list price by 14%, to $390/st from $455/st. Soleil expects potash-fertilizer names to be pressured on the announcement and said their correlation work indicates that at $400 per ton Midwest potash price implies Potash (POT) share price of $90/share."
-Courtesy Fly on the Wall
That's the fundamental news; let's turn to the technicals. A break below the recent lows of $105, can lead to the 200-day moving average, which as the charts shows, hasn't really been respected.
So, the actual trajectory on a break can be somewhat lower than the 200-day moving average. But before that is even a possibility, we'll need to monitor activity around $105; this level has been quite important since October. I suspect this support might put up some fight.
On another note, I have received several emails about my next trading workshop. I am planning it for Jan 23rd; this will be the first session in over 4 months, since I have been very involved with trading, consulting with Hedge Funds and of course writing for the Buzz. If you'd like to be a part of it, please email me.
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Wednesday, December 30, 2009
Years Ending In "0"...A Bad Omen?
There are an endless number of factors upon which to rely to make a market forecast; politics, economic cycles, fundamental ebbs and flows are all fair game, and we're seeing an abundance of them now as the year winds down.
Let's touch on one seasonal cycle that has displayed a curiously consistent pattern over the years. There are many others, such as the four-year cycle, the midterm Presidential election cycle, etc., but for now let's just look at "0" years.
The table below shows how the S&P 500 has performed in years of the decade using monthly closes since 1928. Overall, "0" years have been pretty weak - less than half of them have closed in positive territory. The average maximum loss during the year was -14.3%, nearly double the average maximum gain of +8.7%. Only years ending in "2" have fared worse (just barely).
In a Research Report to subscribers, I broke down the years by quarter, with some interesting findings (e.g. it's never paid to short during the fourth quarter of years ending in "5" or "6"...so, you know, keep that in mind in October 2015).
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- Apple (AAPL) - Yet another target lift on AAPL but this time the analyst is calling the home run ball on the quarter. I too think AAPL will have a stellar quarter and likely an even better year. I'll stick to my low to mid $300's target for now until I see the quarter. Also I think the Tablet buzz (or Slate or Pad or whatever), is justified. As usual, my take on what I think this product will mean is quite different than many other opinions and I'll expound on it next week. As a sneak preview, I think it will be a very solid contributor to the company's bottom line and a great extension of the iPhone platform as well as AAPL leading touchscreen technology.
- A123 Systems Inc (AONE) - AONE has reached the price at which I thought I would be a seller upon my last purchase. Later I thought the stock would challenge prior highs and I'm sticking with that assessment. One of my key themes for 2010 is battery tech for electric cars and fleet vehicles.
- Chicago Purchasing Managers Index - great number and the strength of the economic recovery continues to perform above, against crowded expectations of the contrary. This 60 number on the heels of at least 2-3 prior great numbers may be enough to change the popular tune that January could be a touchy month especially in the early going. In my view I think the small to mid caps should be quite strong at the start of next year with their larger brethren mixed. This number might have me changing my tune on the large caps as I see much stronger jobs growth than current consensus.
- Qualcomm Inc (QCOM) - this stock is approaching my no resistance zone and I'll add that this has been one very quiet name this year. I think QCOM will perform quite a bit better in 2010.
- Electronic Arts Inc (ERTS) - I've added this beaten up leader in recent days. Like QCOM, ERTS didn't perform well this year, but unlike them they also didn't deliver stellar results. I think the potential for hand held gaming is enormous and ERTS is sitting in a great position for the market coming to them and the content they already own. That coupled with a stunning balance sheet could make ERTS a great 2010 story.
Positions in AAPL, ERTS, AONE
Monthly iShares Rundown
Here is a rundown of where we are via DeMark counts on the monthly charts of iShares U.S. stock market sector ETFs.
Sell setup perfected:
- Basic Materials (IYM)
- Consumer Services (IYC)
- Consumer Discretionary (RXI)
- Broker Dealer (IAI)
- Technology (IYW)
- Semiconductors (IGW)
- Software (IGV)
Bar 8 of potential sell setup (already perfected):
- Consumer Goods (IYK)
- Consumer Staples (KXI)
- Healthcare Providers (IHF)
- Pharmaceuticals (IHE)
- Transportation (IYT)
- Aerospace & Defense (ITA)
- Industrials (IYJ)
- Real Estate (IYR)
Bar 8 of potential sell setup (not yet perfected):
Bar 7 of potential sell setup:
Deferred TD Sequential sell signal: Biotech (IBB)
Bar 10 potential TD Sequential BUY Signal: Home Construction (ITB)
Bar 2 of potential sell setup (bullish): Telecommunications (IYZ)
Here is a rundown of where we are via DeMark counts on the monthly charts of iShares U.S. bond market ETFs.
Potential Bearish Price Flip:
- 1-3 Year Treasury (SHY)
- 3-7 Year Treasury (IEI)
- 7-10 Year Treasury (IEF)
- 10-20 Year Treasury (TLH)
- 20+ Year Treasury (TLT)
- California Muni Fund (CMF)
- New York Muni Fund (NYF)
Bar 5 of potential sell setup: TIPS Fund (TIP)
Bar 6 of potential sell setup: National Muni Fund (MUB)
Here is a rundown of where we are via DeMark counts on the monthly charts of iShares U.S. gold and silver ETFs.
Sell Setup perfected: Silver (SLV)
Bar 6 of potential sell setup: Gold (IAU)
Thursday, December 31, 2009
Digging beneath the surface for clues, we find that measures of market breadth continue to deteriorate even as the major indices continue to float near their highs. For example, the percentage of stocks above their 10-day moving average has gone from 81% on Christmas Eve to 71% now. This is an indication that buyers have become more selective.
This adds to a trend that's been developing over the last few months. While the Nasdaq has managed an impressive breakout from its multi-month trading range, it's doing this on the back of fewer and fewer stocks based on the number that are over their 50-day moving average. Part of the problem is the lack of clear market leadership.
One of the reasons that the bull cycle of the past year has been so strong is that it had a rotating cast of leaders: First banks, then retailers, then tech, then energy, then materials, and so on. Right now, aside from today's impressive move in semiconductors and possible early signs of strength among brokerage stocks, there isn't any major sector group rearing back like it's about to enter a new upswing. Materials and energy looked really strong until about two days ago as traders seemed to decide the dollar's resurgence isn't a short-term wiggle but the beginning of something bigger.
If the bulls are going to push a group higher, they need to hurry up and get the job done as the broad market looks increasingly top heavy. We can't make any hard-edged decisions at the moment with volume so light, but we'll be watching closely for clues when the market comes back early next week about which sectors and which stocks are likely to lead the charge in early 2010. My expectation at this point is that tech, and particularly semiconductors, will assert a leadership role. If that does happen, it will be a huge positive for the whole market.
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