Random Thoughts: Is This the Calm or the Storm?
Catalysts collide on Wall Street.
On top of the earnings avalanche that continues to continue—99 companies in the S&P report this week—we've got fresh drama in Europe. Greece is opposed to economic oversight in exchange for aid, spreads in Portugal are blowing out, there are fresh rumblings of a transaction tax in France, and €22 billion in overseas debt is due to roll over this week.
The best case scenario in Europe is increased austerity and upward taxation, neither of which is pro-growth. We must weigh that inevitable reality against the potpourri of international aid, financial bailouts, and synthetic support and then surmise what the net effect will be. One thing is clear—if financial markets were truly free, we would swallow a bitter pill in the short-term but it would be entirely more beneficial for future generations.
In terms of the tape, I recently opined there was a "gut check" coming and this could be it. While the S&P "works" to 1360 through a pure technical lens—as first discussed in December 2011—and the bulls have been emboldened by the muted reaction to negative news (sovereign downgrades and earnings misses), we would be wise to remember the S&P is up 15% since the end of November and 24% since the October 4 lows (when everyone and their sister was bearish).
For my part, I flattened my trading pad before I left town (I hate blind risk) and will trade this tape two-sided—in real-time on the Buzz & Banter—as a function of time and price. The line in the sand for the broader tape—the levels where the bulls will no longer deserve the benefit of the doubt—reside at S&P 1265 and BKX 40, both of which are a ways below current levels.
As always, the reaction to news will be entirely more telling than the news itself, so watch our trading tells as we edge into our five-session set.
NDX 2400—where the four-letter freaks broke out—is the first tangible support for tech.
I continue to monitor the action in commodities as a precursor for equity movement. While there is a case to be made that some of the gold glitter was a function of the "fear trade," the correlation in the marketplace remains high, albeit not as high as it has been in the past. And no, this isn't about The Gold Scold; it's about what happens from here.
Just to set the record straight, I did NOT buy Research in Motion (RIMM) for a takeover; as a matter of fact, I sold most all of it into the frenzied unconfirmed chatter a few weeks ago. I still believe there are brand and patent value, as well as licensing deals and J-Vs could add significant value to the stock. It's just that, in my view, there was too much fast money in the stock and that's not the type of company I like to keep. As the dust settles, I reserve the right to buy back this stock for the reasons originally discussed.
As a father of an 8-month-old daughter, I'll tell you that Barney makes out like a bandit! Whereas I used to walk around with EPMD or Neil Young in my head, I'm now constantly vibing that big, goofy dinosaur. Somebody, please make it stop....
Before I scooted last week, I offered that one of two dynamics was in play and they had opposite implications (naturally). It was either the calm before the downside storm -- the denial before the migration and panic -- following a month-long ramp that has everyone bulled up, or equities are working off the overbought condition through time rather than price.
I HAD layered into NDX puts to position myself for some downside action in tech, but flattened that position consistent with my desire to avoid blind risk. Opportunities are made up easier than losses.
Do I think that we've got a rude awakening ahead? Yep -- even if global austerity measures are successfully implemented, it will be a serious drag on growth. Do I believe that starts today? If I knew the way, I would take you home.
- Green beans in the red sea (read: stocks bucking the downside supply) include Apple (AAPL), IBM (IBM), Sears Holding (SHLD) and Mastercard (MA).
Wall Street lost another of its own last week when Ticonderoga Securities announced it will shutter the doors (joining WJB Securities, which made a similar announcement a few weeks ago).
There is no way to sugarcoat how difficult it is out there (white light to those families) but there is a silver lining on that cloud -- in order to get through this, we have to go through it, and we're going through it now.
As we discussed in 2006:
Therein lies the task at hand for financial professionals around the world—the sell-side, once a conduit of execution, must reassert themselves and demonstrate relative and compliant value if they’re to stay in the mix. There will always be a Wall Street and a need for capital markets. The trick, for an industry mired in overcapacity, is to proactively adapt before the trade passes them by.
If you're fighting the good fight and doing it right, be thankful for demonstrating the resolve needed to chew through these enormously difficult times and the not-so-friendly social mood that surrounds us. There will be winners in the new world and the fact that you're reading this means you're in the running to be one of them. Indeed, one man gathers what another man spills.
As always, I hope this finds you well.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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