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Todd Harrison: Janet Yellen, Bank Stocks, and Turnaround Tuesday

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Observations from the front lines.

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Every now and then I get a little bit nervous that the best of all the years have gone by...
--Bonnie Tyler

It's Turnaround Tuesday on Wall Street, the second set of our five-session stretch. 

The wires are chock full of earnings -- highlighted by second-quarter results from JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) -- as well as the requisite jawboning from Federal Reserve Chair Janet Yellen, who sees "significant slack remaining in the labor markets" and believes that a "high degree of accommodation remains appropriate."

All in all, it's just another brick in the wall (of worry), and in the interest of time management, I'll offer the following Random Thoughts:

  • I've been trading bank stocks for as long as I've been trading -- a span that is approaching a quarter-century.  While corporate earnings are always rear-view, financial shares tend to shift from digestion to projection quicker than most.  In other words, while actual results matter, the perception of future results will matter more, and the reaction to news -- today more than most days -- will trump the news itself.
     
  • One of the reasons I bought Twitter (NYSE:TWTR) (back at $29.99) was the expectation for a terrific quarter given the World Cup.  I sold it (north of $41) a few weeks ago because I happened to catch the easy trade. This morning it was pushed by a sell-side analyst in front of earnings, which will post July 29.  A lot will depend on how it trades into earnings, in terms of field position, and where the whispers are.
     
  • I penned an article on Thursday, The Other Side of Compression, that spoke to the conditional elements of a stock market downdraft.  Between all-time lows in the VXO (INDEXCBOE:VXO), all-time highs in bullish sentiment, and a roundabout arrival at the naked selling of puts (via buy-writes and over-writes), the volatility spring -- layered with negative gamma -- was/is seemingly coiled.  Of course, while bottoms are points, tops are processes, and that may be what we're seeing now, in and around the S&P (INDEXSP:.INX) 1975 bullish price target we flagged a few months ago.
     
  • Or, consistent with (pick a date) over the last five years, none of these traditional guides will matter until the last bear is squeezed from the market, if that hasn't happened already.  I know a few folks who are cautious but precious few who are actually short.  I mean, look at the Bloomberg Smart Money Index below, which doesn't seem so smart, at least when time-stamped at 10 a.m. on Tuesday, July 15, 2014.

 
  • Some of the high-beta names are pretty in pink this morning -- Facebook (NASDAQ:FB), Yelp (NYSE:YELP), Tesla (NASDAQ:TSLA), Netflix (NASDAQ:NFLX), Chipotle (NYSE:CMG) -- which may be a constructive sector rotation (into financials) or something worth keeping an eye on, as these names led the tape lower in the spring.
     
  • The small caps have been active of late; RUT (INDEXRUSSELL:RUT) 1140-1215 is the zone to watch as they're playing, playing in the band.  A break of either side will be telling, in a hindsight sorta way.
     
  • Gold took it on the chin yesterday, which was either an abatement of fear (positive for risk assets) or a deflationary pulse (negative for risk assets), along the lines of crude being more negative at $50 vs. $150 (endemic of slowing global growth).
  • Janet Yellen, answering questions before the Senate Banking Committee, noted that small-cap biotech and social media valuations are a bit high relative to historical norms.  Can someone please explain to me what the historical norms of social media valuations are? Was this her version of Greenspan's famous Irrational Exuberance speech?
     
  • I find it increasingly difficult to keep financial TV on in the background these days, although I can't tell if that's a function of the state of the content or my channeling of Neil Young. Either way, it's not my bag, baby.
R.P.

Twitter: @todd_harrison

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No positions in stocks mentioned.
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