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.
Here is a small sampling of this week's activity in the Buzz.
Signs of a Coming Fall?
An interesting chart posted on
by Chris Kimble made the rounds this weekend. It shows that over
past decade, many of the major market turns, including the two
cyclical bear market bottoms, commenced within 10 days of the of
the autumnal and vernal equinox.
As we know, fall began this past weekend. Kimble also points out
that Thursday's thrust higher followed by Friday's sell-off leaves
a big bearish wick on a candle chart. He also notes that last week
saw the largest inflows into equities funds so far this year.
Oh, and just to throw an extra dash of tenuous cyclicality into the
pot, this past weekend was a harvest moon. I'm typically not big on
seasonal trading patterns, but the visual on this chart is fairly
arresting and something to keep in mind as we head into the
typically volatile October period.
Click to enlarge
Portfolio Review and Mental Updates
If you recall my
, you know I drastically reduced my long exposure from 92.5% long
down to 47.5% long mid-to-late last week. Having this much cash on
hand always makes me nervous, anxious and I feel like I want to
deploy it back into the markets rather quickly. The banks were
lagging which was our major tell with regards to the market not
holding this breakout (
first mentioned on 9/12
). The markets ran and the banks got rejected by the 50 day moving
average from above. The banks in combination with the Island
Reversal exhaustion (
mentioned on 9/16)
and full measured move right into heavy overbought conditions,
seasonality and historical analogs (
Deep dive on 9/19
), led us to think that this market got ahead of itself. I always
find it important to review "what was" to look for clues of "what
will be". So what now?
Per my style, I wait. We are burning off the overbought conditions
nicely as we have taken NYMO down from +85 down to +33. From Friday
when I posted this (
), it is clear that option 1 is off the table as we didn't flag to
move higher. Option 2 and three are still very possible, with
option 2 more likely at this stage. The gap around 169 should
remain a magnet and should at least get visited, if not filled. I
will likely take a shot at deploying the cash into US Large cap
indexes again around that gap, most likely in two separate buys.
Should we break down further, a close below the 50 day moving
average would cause me to lighten up further.
It is still worth noting that the
Small Cap Growth
(NYSEARCA:EWZ) ETFs continue to show strength versus the rest of
the fray. These need to be watched very closely. If they can
continue to hold higher while the large caps fill the gap, we are
likely setting up for another leg higher and simply putting in the
"higher low." Should that happen, I will go back to 90%+ long with
a beta over 1.0 with trend rules back in place. It is worth noting
that while we are not technically in a "trend rules" market, we
aren't exactly in a "trading rules" market either. It really is an
odd situation here.
Click to enlarge
Click to enlarge
Click to enlarge
(S&P mini futures) opened Sunday night by tagging the weekly
pivot at 1706.25, and staying weak for the most part after that.
Today's pit session open immediately sold right under 1703.75, the
prior all time high. The pre-FOMC announcement VAH was 1698.50,
which ES has now lost. Downside risk is the NVPOC at 1680.50,
should we lose weekly S1 at 1685.50. Anything below that is real
) was down 2% at the open, giving some clues as to this weakness.
Interestingly enough, the
(INDEXNASDAQ:NDX) futures) spike on the
) iPhone sales news barely moved the needle for everyone else.
Bulls get control back above ES 1703.75.
Equities correcting from excess speculation (highest margin debt
since 2007) and bonds moving up could be the perfect scenario for
Click to enlarge
DÃ©jÃ Vu All Over Again
The "Doom-du-jour" front in the minds of traders and investors
everywhere is anything other than unfamiliar. We've been through
the Debt Ceiling/Fiscal Cliff rodeo once or twice before these last
few years. The showdown this time around could see the same sort of
drama that sparked the 20% sell off in 2011. Thus far, the analog
Dow Jones Industrial Average
(INDEXDJX:.DJI) (based upon the DIA ETF) from the 2011 peak against
current price action is stacking up a little too well in my
There's no reason to have conviction enough to trade the current
action based on what we saw two years ago, but with the sneaking
suspicion that a bullish ramp could encounter resistance via a
miniature double top around the area of the post Fed announcement
last Wednesday, it's worth noting a bull trap is possible. Should
you like to monitor how this formation plays out real time (and
play with the analog), you can do so here.
Good luck out there!
Click to enlarge
mREITs Hanging in Alongside Agency Rampage
mREITs have been seeing positive performance the last two days on
the positive performance in rates.
, they all lowered their quarterly dividends rather significantly.
Thus far, they have not repriced to a much lower dividend yield,
which is representative of one of these possibilities:
- Investors are OK accepting a lower yield as the trusts have
delevered their balance sheets.
- The market is betting that these trusts will be able to raise
their dividend in the coming quarter(s).
Am I annoyed that I missed out on potential profits by selling
early? Most definitely. Am I angry for selling last Friday? Nope.
Your first sale is always your best sale and my thesis had shown
some weakness, so I cut bait. Full disclosure: I did reallocate
that capital into another, more conservative mortgage fund, and
some into munis. The muni investment is purely from an income
basis, not capital appreciation (though it would be nice).
Following Up on Debt Ceiling Plays
Further on the mortgage space, the color I've received from the
mortgage market over the last two days would be typified as a
buying rampage. Literally, I was told that dealers are having a
hard time sourcing inventory FOR SALE. That makes me nervous and
happy. When 1-800-GET-ME-IN is lit up like that, you have to pick
up the phone and sell some. I'm happy because those who "sold first
and asked questions later" earlier this summer are recommitting
Either way, the lower coupon (3.5-4 for 30yr), seasoned MBS remains
the best place I can come up with in terms of a defensive play on
rates, and it could even bear fruit in a rate rally. You're
essentially hiding out in a zero credit risk instrument with
reduced extension risk and earning
income. Not the sexiest of trades, but it beats losing. Prepay
speeds have essentially gone to nothing and paydowns are dropping
like a rock.
So with investor uncertainty in committing long-term capital in the
current environment, the reinvestment actually works out in your
favor as hopefully the policy uncertainty goes away a year from now
and there will be more clarity for other credit investments.
Understanding the Dynamic in Congress
Yesterday afternoon, CNBC debuted poll results I found fascinating.
It highlighted how nobody but those voters who self-identify with
the Tea Party want to hold the debt ceiling hostage to defunding
the PPACA (aka 'Obamacare'). Other data from the same poll suggest
only 36% of self-identified Republicans who despise the Tea Party
want to defund the PPACA. That's slightly less than "all adults",
which comes in at 38%.
There is a three-party system in Congress at the moment --
Democrats, Republicans, and the Tea Party. Speaker Boehner has put
together a majority coalition in the House between the GOP and the
Tea Party. He's allowing the minority party in that coalition (the
Tea Party) to dictate policy for the coalition on this issue.
Most Wall Street types would amend that to, "dictate policy for the
." I'm not sure I agree. Examining the Tea Party as a separate
entity, I don't see much room inside their platform and ideology
for compromise. They hate government and seeing it shut down would
be considered a success for them. Since the GOP allows Tea Party
candidates to run under the GOP banner, mainstream GOP leaders are
terrified of the Tea Party minority -- largely based on the threat
of primary challenges.
It may be Speaker Boehner and his fellow Republicans decide to
break with their minority coalition partner, but I don't think that
break will come quickly. And certainly not quickly enough for the
debt ceiling vote, which is where the risk to the equity markets
Click to enlarge
Waiting to Exhale
I'm sitting in the Delta terminal awaiting my flight to Chicago--a
quick meeting, dinner and a 630AM flight home tomorrow--so please
excuse the brevity of this post and my absence today.
Since tagging an all-time high on the heels of the decision not to
taper last week, the tape has been lower four consecutive sessions.
It's been about as shallow a pullback as one could see, all things
considered, but four days is four days, and the bulls are hoping it
ends there. Performance anxiety is good and thick, we know, which
lends itself to a "buyers are higher and sellers are lower"
The banks have been the best tell of late, in part due to their
(highest) weighting in the
(INDEXSP:.INX) and in part a function of their encapsulation of
macro influences (rates, smoke, yield). They remain on our radar,
particularly in and aroundKBW Bank Index
(INDEXDJX:BKX) 62, which is the August low (the 200-day is down
S&P 1729, 1709, 1700 and 1665 remain levels of lore through a
broader lens, for those who are looking to stair-step risk.
The looming unknown continues to be nestled along the political
front, which will overhand the tape for the remainder of the week.
The market has climbed a wall of worry all year -- four years
actually -- so keep that in the back of your crowded keppe, as it
will work until it doesn't (which is why we must manage risk rather
than chase reward).
Good luck today, and think positive. Profitability begins within.
Garden Variety Pullback?
Lots of folks are fretting about the fact that we finished down
four days in a row, and may be making it five today.
However, remember that before the slide, the S&P 500 was up 11
out of 12 days, which saw us hit an all-time high of 1729.44 on
I took a look at recent four+ day slides, and if this short history
is any indication, the bulls should be just about ready to make a
1) 8/14/2013 - 8/19/2013
We were higher three out of the next four days, including 8/20.
2) 12/21/2012 - 12/28/2012
The market was up 4.3% in the next two days, down the third day,
and up again the fourth day.
3) 10/5/2012 - 10/10/2012
The market was up four out of the next five days.
4) 9/20/2012 - 9/26/2012
The market was up five out of the next six days.
5) 7/30/2012 - 8/2/2012
The market went up six days in a row.
6) 7/20/2012 - 7/25/2012
The market rose two days in a row afterwards.
7) 7/5/2012 - 7/12/2012
The market then rose four out of the next five days.
8) 5/11/2012 - 5/18/2012
The market went up four days in a row.
Why Now May Be a Good Time to Lock in Your Natural
Elliott Wave International
To borrow a line from
The Game of Thrones
, "Winter is Coming" -- but there may also be another reason to ask
your natural gas provider if they have a low fixed rate.
Below there's a chart of the NYMEX natural gas November contract.
Here's its Elliott Wave message: Nat gas is ready to surge higher.
The wave pattern since early September has the look of an expanded
flat correction, an a-b-c move where wave b retraces more than 100%
of wave a. It's an important pattern to recognize. In this case,
the wave b rally made it look like price was breaking out to the
upside -- when, in fact, it was about to roll over to a new low for
the move in wave c.
That wave c looks almost complete -- and with it, the
one-larger-degree wave (ii). From here, nat gas should rally. Trade
above 3.694 (3.617 from a continuation perspective -- i.e., basis
the expiring October contract) would strengthen the case.
If my big-picture count is on target, the market doesn't have any
business trading below the 3.281 early August low.
Click to enlarge
Thursday, September 26
Blending DM Interest Rate and EM Credit Risk: Foreign
Currency Deposits in Emerging Markets
on the mechanics of foreign currency retail deposits being raised
by global banks into India (the FCNR-B accounts).
The risk involved is here is that the initial customer deposit is
levered multiple times to open several deposits -- a practice
reminiscent of the equity line of credit on housing during the
I presume similar lending practices would likely be happening in
various emerging markets given the currency re-calibrations in many
The bulge bracket banks are in effect multiplying the interest rate
risk already embedded in their lending books (courtesy of the bulk
of credit growth in developed markets being directed to adding low
coupon bonds on the balance sheets post 2008).
To this they are adding the credit risk embedded in EMs courtesy of
the dovish monetary policies and yield chase of the past few years.
In my opinion, real yields in the UST market (or a credit event in
EMs) remain a key tell and HSBC, given its geographically
distributed book, is the key stock to play this interest
rate/credit risk double play on the downside (if and when...).
As the market searches for it's next leg, there has been plenty of
movement in individual names.
) stand out on the downside, while
(LNKD) -- which is trying to break out through $260 -- trade like
they could do no wrong.
While the tape has climbed a wall of worry for some time, it
remains to be seen if it can lift into the weekend with a
government shutdown looming. The bulls will argue that it's a
matter of time before we see a "Syria-type" ramp upon resolution
but the timing of said resolution is unknown.
What we know is that performance anxiety is particularly ripe; the
lesser-known story is the recent rise in the discount rate has
lowered pension fund liabilities, bringing them closer to being
funded (reducing equity risk appetites on the aggregate). Maybe
that matters, maybe it doesn't -- greed and fear are the drivers --
but we strive to see all sides, and now we do.
One step at a time as we continue to find our way.
SPY Value Lines: Unimpressive
Today's action is simply unimpressive. Why? Gap open that moved
above resistance and failed by 11:00 a.m. EDT. We have moved below
pivot and are back above it, for now. The one apparent thing:
sellers are in control this week.
Click to enlarge
Friday, September 27, 2013
As an update to my last BlackBerry post -- Jefferies analyst Peter
Misek is out saying that while Fairfax Financial's bid for the
company is legit and likely to go through, Fairfax could be short
up to $1 billion in financing, and a lowering of the $9/share bid
is on the table.
The market is reflecting a great deal of uncertainty regarding this
deal, as the stock is trading at about 10% below the offer price.
I like to say that merger arbitrage is a game best played levered
to the hilt with other people's money, but I went long the December
8/9/10 butterfly spread on BlackBerry for $0.25, which pays off if
the deal goes through.
Fairfax has until November 4 to perform due diligence, so I assume
we'll know by December whether the transaction happens.
Downside risk is 100% of the price of the butterfly ($0.25) should
Fairfax pull out, while theoretical max value of the spread is $1.
Now I don't have total confidence that this deal gets done -- but I
view the risk-reward as balanced enough to speculate on it.
If you're not familiar with butterflies, The structure for this
spread for each lot is as follows:
-long 1 $8 call
-short 2 $9 calls
-long 1 $10 call
If you'll notice, this trade is comprised of a combination of a
bull call spread (long $8 call and short $9 call) and a bear call
spread (short $9 call and long $10 call)
The theoretical maximum value of the spread is $1 (the distance
between the strikes) as at $9 at expiration, the $8 call would be
worth $1, and the $9 and $10 calls would be worth zero.
Now normally, butterflies only profit very close to expiration when
the premiums of the higher strikes get crushed.
But in this case -- a firm indication that the deal gets done at $9
should kill the value of the $9 and $10 options because of the
removal of uncertainty, while the $8 call will be still worth
around $1, giving a 3:1 return if the deal happens.
Disclosure: Minyanville Studios, a division of Minyanville
Media, has a business relationship with BlackBerry.
TBT Verges on Opening Range Breakout
ProShares UltraShort 20+ Year Treasury
(NYSEARCA:TBT) is verging on an Opening Range Breakout following
gapfill this morning.
10-min TBT Chart for 2 Days:
Click to enlarge
At the same time, the dailies look in a position to rally with the
10-year yields pulling back to gapfill from August 13.
Daily CBOE Interest Rate 10-year T-Note (INDEXCBOE:TNX)
Chart with its 50 DMA:
Click to enlarge
Even a backtest of the TBT's 50 DMA projects to 77/78.
Daily TBT with its 50 DMA:
Click to enlarge
I was asked to update
from earlier this week on funky T-bill rates and US CDS. The US CDS
curve has resteepened and is not reflecting a high risk of imminent
problem like it was earlier this week. The 1yr CDS is still
elevated at 30bps from its more recent 10bps, but that is down from
60bps+. Past that, the curve has held its normal steepness.
Inverted CDS curves means that there is a high risk of default in
the very near future.
For T-bills, the student body has moved to the other side of the
boat... again! This morning the 6-mo bill due 12/05 traded at a
negative rate (bills pay no coupon so price at a discount to par,
ie the discount rate). The +4.5-6bps range we saw for near expiry
bills has now declined to +1-2.5bps, which is getting a lot closer
to normal. Bills out past that into 2014 are still stuck at 0,
There is also the effect from the Fed's Fixed Rate Reverse Repo
Facility (the Death Star), which is driving down bill rates.
Liquidity is tightening because cash is being pulled out in
exchange for collateral, albeit small amounts. It's also pushing
down LIBOR rates, which doesn't make sense in retrospect because it
reduces the supply of cash in the system.
Anyway, the conclusion is that the interest rate market is not
pricing in a large chance that we see a serious risk to a technical
default at the current moment with a technical default being where
maturities on T-bills or notes is delayed, missed, or the like.