Market Thought... more technicals

I would look to take on SPY put protection via the 123 Dec puts.  I would most likely take on the put protection on Monday, 15 min or so after the open or if the SP500 sees 1230 (or the 320SMA).

But realistically, if I was actually looking at the sizable gains of a would be AAPL, QCOM positions, along with the trading via the 'opportunity loss' trades, I would be taking on a light protection now, and add on Monday as indicated above.  Then wait for the position (DIS, DD, ETN, SLB, SU, POT, IBM etc) I would want to get into (as highlighted in the post below).

trading thoughts... AAPL, QCOM, IBM, GOOG, DD, DIS, ETN

(Below are trades I would actually do, but can't, so I am venting them below.)

AAPL - The only new info since my last post on AAPL (explaining the potential for the 420 level to be achieved) is the market's reaction to GOOG's report.  AAPL will most likely see  420 before it reports. (I would not add to my AAPL because of Google's report, but I now would not sell my light position at 420. I would let it ride into earnings, and sell into potential strength from their earnings.)

QCOM - I stand by my recent assessment of QCOM. I would not alter the trading highlighted in that post.

IBM - My opinion has not changed.

GOOG - Anyone playing this one into earnings, congrats!! Even if I had the ability to trade, I would not have been so bold this go around. The Motorola and IBM patent acquisitions, and potential Oracle settlement gave me doubts the headline number would be off. I thought GOOG would take a sizable charge this quarter for one of these things, but I did not see these costs in their report.  Regardless, it was a nice report and the stock is acting accordingly.  At 600, GOOG is approaching a very hard resistance.

Also, given the macro-environment, I do not know if the market will allow for a high degree of multiple expansion right now.  If GOOG can trade with a trailing PE of 19, it can trade in the low 600 area. Basically basing at its resistance.  If the market allows for multiple expansion, then it can break out.  This scenario is not something that appeals to me at the moment, so I would not trade GOOG on the hopes of multiple expansion.  (I would rather play GOOG if it sees 560-570 level, then play the breakout going later on in this quarter.  As the end of the year comes closer, then I expect Google to break out.)

DD - This stock usually trades with a trailing PE of 14. Its currently near 12. If recession is taken off the table, and factoring next quarters results, DD can easily test the 200SMA or 48. I would  enter a position near 42, and another at 40.  (I would play the common as there is a nice dividend that can be a cushion at current levels.)

DIS - Looks to have formed a nice bottom, and is basing. I would start entering 5 Jan 2012 32 strike calls at 32, and add to the position at 31. Would look to sell in stages from 34 and then at 37.

ETN - Looks to be forming a bottom. I would play the common (for the dividend cushion), starting an initial entry near mid 39, and add a second near 38. I would look to sell around 44-45.

(After entering these positions, I would be more inclined to maintain a light SPY put protection.)

Market Thought... technicals

Just wanted to follow up with some more details around the market technical levels.

The SP500 is near its 5SMA, pending on negativity, there could be a move to the 1180 level.

FYI... as per my previous post my only positions right now would be AAPL, QCOM and GS. Because of the relative strength in AAPL and QCOM, I would be covering my protection here.  I would also be looking to add to GS with this weakness. (I would already have a light position here, and add one option here, then another at 92.)  We already know banking reports will be weak, and the current reaction is from a "V" shape move from the lows.  (I find myself getting more bullish on financials the more I here them being bashed. Also, the activity highlighted on CNBC by Beazer Homes is going to make me dig into housing stocks, and see what the sector is saying.)

Market Thought... the herd

Even though I am well aware that market action tells traders how to behave, I still find myself amazed when I witness it.

The type of bullshit that is allowed to circulate and gain credit is just truly amazing.  But that just goes to show the lagging and reactive nature of the market players mostly because a lot do not rely on solid fundamentals. They rely of 'what if' scenarios and false indicators, not questioning the meaning behind the numbers.  In any other time I would be thanking their predictable craziness, but this go around I sat out of it.  I am just glad I have this blog to time stamp my thoughts through out this craziness.

So, as they run like chickens without heads, we try to use our heads.  At this stage of the game, I would have light positions in AAPL, QCOM and GS (as highlighted in previous posts).  Through out this mess I would have maintained my BGCP, ITRI and AXPW.ob positions. And depending on the cash I would have accumulated I would determine if I needed to unload the second position of BGCP. But given the opportunity loss I calculate, I would be holding the entire BGCP position until it hits 7.75, then sell half.)

I would take on light 122 Jan 2012 SPY protection here.  This SPY position would be used for any very-short-term protection, as the action suggests short-pull backs, until Nov 3rd.

Many stocks and sectors are forming a bottom here. It started with the semis (as I pointed out during the heart of negativity), and the rest of the market is now following.

I would be waiting for initial entry points on SU, POT, ETN, IBM (after they report), DIS, GOOG (after they report) and SLB. All of which, like the market, saw "V" shape moves from the bottom.

The market seems like its clear sailing until the Nov 3rd EU plan is announced, but once the plan is announced the rating agencies will most likely start downgrading EU countries and Greece default goes in effect, which would provide some hick ups. The hick ups will not matter as much because US and EU bank capital can withstand it. (After Nov 3rd, there will be a green light to short the Euro again.)

In the mean time, if the SP500 see a 90eps (about $8 below estimates) for 2011, the potential range is 1080-1260, given a 12-14 multiple.  If SP500 sees a 100esp (about $10below estimates) for 2012, the potential range is 1200-1400.  So the market may form a base around the 1200 level, until economic data gives us better clarity.  (My lower eps is due to the hits the materials and banks should take due to lower commodity prices and banking pressures.)

While its tough skating against the herd ;),  it always feels good to be a few steps ahead.

SocGen's 2 cents

SocGen's opinion on EU banks is literally worth 2 cents, probably along with the equity value of their bank.

Playing the equities in the EU banks right now is a game of Russian Roulette.  Each bank will need to get re-capitalized, and they will. But which one will be the bank that looses their equity in the process?  Dexia was supposedly the strongest of the EU banks, and look how that turned out.

The EU banks is a high risk/high reward game, with a ton of uncertainty.  The better high reward lower risk play is the US banks.  The US banks declined in sympathy to the EU banks.  Once the EU banks are re-capitalized, the US banks become relatively safe again.

The only risk to the US banks are the forced selling of assets from the EU banks (that was seen last Friday in the CMBS market) that could depress asset values while the selling takes place. With all the capital the US banks have, this threat is meaningless with respect to their operations and will act as a short-term hickup to earnings potential, via write-downs. (But with real-estate chillen at bottom levels, the missed priced assets from forced selling, actually have real value this go around.)

As I highlighted a week ago with the GS call, banks are in a bottoming process now.

AAPL trading dynamic

I have been consistently highlighting AAPL's trading dynamic, with the low end being Steve Job's resignation and the 90SMA (which also corresponds to a very low multiple valuation).  Now it is testing the 400 range.

Given its underlining strength, low multiple base and the fact that I now I can discount ECRI's recession call, AAPL looks to want to test the 420 area.

I should note how I would normally been playing AAPL, as this is one of the opportunities lost.  Near 370 to 350 I would have been purchasing 370 Jan call options.  Purchasing Two option in the 360s and two in the 350s. As AAPL rallied off the 350, I would have unloaded the one purchased in the 350s. Maintaining the two purchased at 360, and any other position I had maintained going into its decline (although the options would have been re-posititioned to a 370 strike). On Friday's weakness, at 370, I would have added one position, leaving me with a total of 3 options (and what I maintained).  With yesterday's move, I would have sold off the 2 options, and today I would have sold off the remaining third option.  Leaving me with a minimal position I held onto into its decline. (I would reposition the options again, to a 390 strike here.)  I would be holding on to this position until the 420 level, and wait for a re-entery into AAPL.

(In hind-sight, this action took place within a 3-4 day period, but earlier this year, AAPL's weak trading took place over a multi-month period. My trades are not time dependent, they are price dependent. Hence my inability to take on these trades at the moment.)

Basically, going heavy near 360, and being light at 400.  But since there is now a greater possibility of pushing higher, I would maintain a light position, but not an added position. (I would add a 390 Jan call option to the position if 390 is seen from the potential 400 level resistance.) 

Market Thought... one-eyed man

In the land of the blind, the one-eyed man is king.

I know I already wrote my Market Thought post for the day, but quite frankly, the very aggressive ECRI recession call has been bothering me since I saw it on CNBC. (Simply does not jive with data, especially the Baltic Dry Index.) Since then, I have been looking at leading indicators, and trying to assess them individually to confirm my original thesis that 'special circumstances', like the Fed twist or specific (but controlled) easing from China or something was skewing the results.

I was combing the chatter today, and came across this blog post that posted the ECRI Weekly Index, which saw the index pointing to recession.  The below chart is from the article.

My interest in this chart is from 2009 onward.  The index had a sizable move in 2009 representing the start of the March 2009 market rally.

What I found most interesting was the decline in the ECRI index in the middle of 2010.  During this time, the market saw a full blown correction, hitting the 360SMA support.  A period of time, the big-boys were really scared, and when took place I did not understand why so many of the big boys were scared.  This was the data point I did not have access too, but regardless, my thesis that the rally would continue was correct, and the market rallied hard after testing the SMA. Looking at the above chart, now I understand why they were ALL scared.

So, a few weeks ago a similar ECRI index set up was achieved, except the market is completely broken down technically.  And I am willing to wager, the reason ECRI is so aggressive with their call this go around is very much to do with the breach of the March 2009 rally via the 360SMA. (The stock market is viewed as a leading indicator.  A broken market suggests a broken economy.)

Here is where I am finally able to call BULLSHIT on the fear of recession, and side with Buffett.

In 2010, the market correction was predicated on issues with the EU, issues that were fixed with band-aids allowing the markets to rally.  However, now, the EU issues could no longer be contained due to the bank runs.  The potential EU induced credit freeze alone is enough of a shock to the equities markets, but the SP500 has about a 100 point decline because of the US debt downgrade.  The down grade came right before we started seeing signs of EU bank runs, which eventually caused the markets to completely breakdown technically.

The markets would not be broken down technically, if Standard and Poor's did not downgrade the US.  This downgrade holds absolutely ZERO economic effect.  It only effects the momentum whore traders that actually give a rats ass about these technical levels. (And entities forced to sell due to their by-laws.)  The massive volatility we are seeing would have been seen on the 360SMA, not below it, ultimately maintaining the trend.

Basically, I think ECRI's conviction is very wrong with their recession call.

I know the above sounds really bullish for the equity markets, and I think it is. However, once the EU bailout plan is announced, the rating agencies will downgrade a few EU countries. France is most likely a target, and maybe even Germany.  Potentially capping upside, until this is washed out. But worst case scenario market action, IMO, can be removed.