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The Morning Hammer: Another Day, Another Record, Another Yawn
Yesterday, the S&P, Dow, and Nasdaq all made new record highs as the most boring bull market ever just kept on chugging. The S&P has now gone 24 days without a 1% move. Bulls obviously won’t argue with the results. Bears are sweating like crazy because they’re playing the “what goes up must come down” game. But sometimes, what goes up stays up much longer than seems reasonable. It’s been an especially bad month for traders buying puts, because there’s nothing worse than a slow grind up with declining volatility — you just get eaten alive a penny at a time. Getting wiped out in a spike high is actually better because at least you know it’s over and you can move on. That said, I am long VIX calls, which means I’m speculating on a significant volatility spike. I may have gotten into this trade a little early, but I still believe the odds are on my side. Overnight, Euro-area GDP came in as expected, though Italy’s was weak. The UK also reported weaker-than-expected construction spending in June. So while economic data around the Brexit was actually generally decent relative to expectations, it’s now falling off a little bit. This lends some credence to the Bank of England’s massive reduction in its GDP forecasts. And China’s factory output, retail sales, and fixed-asset investment all missed expectations. Today, SPX futures are flat as an ironing board, and there’s not much movement elsewhere. The dollar’s flat, commodities aren’t doing anything dramatic, and European stocks and bonds are roughly flat. There’s some movement in Europe, but overall, the world is falling asleep. Sentiment is still somewhat bullish, as judging by the steep VIX curve, Investors Intelligence Survey, and CBOE equity put-call. Permabears are saying everyone’s complacent, but I wouldn’t go that far. I’d say we’re at about a 7/10 in terms of crowd bullishness. (with 10 out of 10 being psychotically bullish) On today’s calendar, we’ve got retail sales, PPI, U. of Michigan Sentiment, and the Baker Hughes Rig Count. Maybe retail sales can shake things up a little bit. JC Penney (JCP) just reported a small sales miss, which is a little disappointing after the beats from Macy’s (MC) and Kohl’s (KSS) yesterday. I’d watch the usual suspects today — oil, biotech, small caps, and high-yield. These are the key attack areas for the bears if they’re ready to rock. Good luck friends.
Continue Reading -->The Morning Hammer: Let’s Talk About the Royal Institution of Chartered Surveyors
Attention! This afternoon, T3 Live’s Dave Green is hosting a FREE trading webinar. Click here to learn how Dave crushes the market! We’re looking at another potential snooze-fest with US stock futures showing fractional gains. Gold, oil, and US Treasuries are basically flat. Alibaba (BABA) is up nicely on a solid earnings beat and acceleration in growth, while Shake Shack (SHAK) is getting smacked up on a revenue miss. Europe is up at a 7-week high on solid earnings from European financials. The Stoxx Europe 600 Index is now inches away from erasing all its post-Brexit losses. That’s just another example of why you should always think twice about buying into stories of ultimate doom & gloom. There are meteors flying around all across the universe, but very few will ever actually hit the Earth. However, the Royal Institution of Chartered Surveyors said the Brexit is hurting the UK housing market, which is keeping a lid on the FTSE 100. And yes, that’s how boring today is — I’m talking about the Royal Institution of Chartered Surveyors. So it’s back to the waiting game. We’ve gone 23 days without a 1% move in the S&P 500. Typically, the S&P moves 1% on about 1 of every 3 days, so during normal times, we’d have seen 7 1% moves during this time span. But what can you do? This aint normal times. It’s August, sentiment is mostly positive, and the indices need to digest big post-Brexit gains. I’m long VIX calls so I obviously have a vested interest in a big market shakeup, but I’d also like a reason to pay attention to the market! Now, one reason we may get a big move soon is the street is short volatility in a big way. The short VIX futures trade is huge right now, and as we know, when everyone leans the same way, Mr. Market likes to pull the rug out. The only question is the only question that matters in financial markets: when? I’m sitting tight… not that I have a choice. Click here to check out Dave Green’s webinar this Thursday!
Continue Reading -->The Morning Hammer: Another Day, Another Yawn
On Thursday, my buddy Dave Green is hosting a FREE trading webinar. Click here to check it out! Yesterday after the close, the American Petroleum Institute reported a 2.1 million barrel increase in crude oil inventories, which is pushing oil prices down a bit overnight. We have EIA inventories coming at 10:30 a.m. ET, with economists expecting a -1.5% million barrel drop. They also expect drops in Cushing, OK inventories and gasoline inventories. We also have JOLTS Job Openings at 10:00 a.m. The People’s Bank of China said it will promote greater international use of the yuan, though the bank didn’t promote much detail. The dollar is down as traders believe the Fed will be less hawkish… ALLEGEDLY. That’s the picture some outlets are painting, though I’m not buying it. Fed Funds futures are now pricing in a 45% chance of a December rate hike, down from 47% last week. That’s not much considering this number was 9% on June 27, just after the Brexit. The reality is that Fed expectations can turn on a dime. A few more hot economic data points and hawkish Fed head chatter, and it could go above 60-70%. And of course, it could go to 30% just as easily. Crude oil has climbed off overnight lows and that’s pushed SPX futures into the green. So we’re back in the waiting game as the August doldrums continue. Yesterday morning, I went long VIX calls, which means I’m effectively short the market in the near-term. (I also have long-term equity/HY exposure through AAPL, BGR, KYN, PHK, VIG, and UTF, none of which I would buy now, except for closed-end fund dividend reinvestments) But for now, it looks like Mr. Market is quite happy to stay in this go-nowhere range. Crude oil was saved from breaking $42, though the 10:30 a.m. inventory numbers could change that. Also keep your eyes on the other usual suspects — the Russell 2000, biotech (IBB), and high-yield (HYG). The bulls have done a great job of defending these key areas, so see if they can keep it it up.
Continue Reading -->The Morning Hammer: Why the VIX Could Collapse, and 4 Other Thoughts on Today’s Market Action
5) Tesla Destroys Options Traders Yesterday, I opined that Tesla (TSLA) options were probably not as cheap as they looked. It turns out they were way oveprriced. As of yesterday morning, they were pricing in a $12.84 move. Tesla is down only $1.30, which is absolutely murdering holders of puts and calls. Weekly at-the-money $225 calls are down -67% while the $225 puts are down -55%. Meanwhile, sellers of the weekly $225 straddle are up an amazing 61% in one day — I wish I was in that crowd! 4) Watch Dem Bios! For the past 2 days, the SPX has looked pretty sleepy. However, relative strength in biotech (IBB,XBI) and the Russell 2000 implied more bullishness under the surface. Today, both IBB and XBI are in the red, but making little moves off the lows, even with sector heavyweight Biogen Idec (BIIB) sinking another -1.7% as takeover rumors extinguish themselves. If I was a bear, I would most definitely not want to see biotech turn green and lead again, especially since the Russell is outperforming SPX by about 30 bps. 3) Sentiment Update Sentiment is still getting more bearish. The CBOE Equity Put/Call is at 0.94 this morning, which is right in-line with the YTD average, but well off the early July lows. However, the ISE Sentiment Index is at 66 this morning (66 calls for every 100 puts). That’s a of aggressive hedging in the early going. Plus, the AAII survey shows 29.8% bulls — well below the long-term 38.6% average. Overall, it looks like traders are looking a little more skittish ahead of a pivotal NFP report tomorrow. 2) Oil Crude oil is still hugging the $40-handle pretty tightly. I’m still a bit puzzled as to how well both equities and high-yield are ignoring oil’s 20%+ drop off the highs. Take a look at this chart of crude oil vs. HYG year-to-date: Energy stocks have been slipping, but overall, the market’s basically yawning at oil weakness. Maybe folks are just rotating into metals? GLD is up 28% YTD while SLV is up 46%. Meanwhile, the miners (GDX) are up 127%! 1) Why the VIX Could Collapse Lots of traders are out saying the VIX is low, but I believe it could drop to the 10-11 range. Remember what the VIX is — a representation of volatility expectations, as measured by 30-day SPX options. With the recent lack of movement, 20-day realized SPX volatility has collapsed to 5.4. So the 12.6 VIX is actually trading at a massive premium to actual market volatility. This means it’s already pricing in an expansion in volatility. If the market continues to go flat (which I expect for the next month) — or if it climbs slowly — the VIX could easily drop below 11 as traders reprice options to reflect persistently low actual market volatility. Now with a wild move, all bets are off (we do have NFP tomorrow) — buyers of puts or call could make a lot of money. But if the markets go flat as I expect, folks buying what look like “cheap” options will find out that they overpaid. P.S. If you’re into this fancy options stuff, check out today’s FREE webinar with my buddy Doug Robertson.
Continue Reading -->The Morning Hammer: 5 Thoughts on Today’s Market Action
Make sure you check out Doug Robertson’s options webinar, which is scheduled for Thursday after the close. Click here for more details. 1) Biotech Looks Great The SPX and NASDAQ are basically flat, but the Nasdaq Biotech ETF (IBB) is up 0.4%. That’s pretty impressive given that Biogen Idec (BIIB) is off -3.6% today as cold water was thrown on yesterday’s takeover rumors. BIIB is 7.8% of IBB, so biotech really is doing well on this shaky dayy. The S&P Biotech ETF (XBI), which is muct more diversified, giving a better view of biotech overall, is up 0.7%. 2) Crude Oil Too Strong? I’d rather see crude oil down into today’s inventory number at 10:30 a.m. ET. Oil has acted horribly and I’d rather just see an all-out collapse of expectations ahead of the data release. Economists are pricing in a -1.75 million barrely draw. We’re about to find out if that hurdle is low enough to clear. 3) Sentiment Weakening Just a Tiny Bit The VIX is flat today, but other indicators show that traders are getting a tiny bit spooked. The CBOE equity put-call ratio is still above the YTD average and the ISE Sentiment Index shows increased demand for put options. But one thing I don’t like is that the Investors Intelligence Survey has barely budged. 52.9% of newsletter writers are bullish, down just 1% from last week. That’s still within range of II’s danger zone. On balance, I’d say that traders are still pretty complacent — just not extremely so. 4) Tesla on Tap Tesla (TSLA) reports earnings today after the close, and a few options guys are chattering that Tesla options look cheap into earnings. Tesla options are pricing in a $12.84 move, which is actually small relative to some of its recent post-earnings report reactions. But I’m not so sure the options are cheap. Tesla has recently announced a boatload of news, including a capital raise, launch of Model 3 reservations, and the SolarCity (SCTY) deal. So Tesla may not have many big ‘shockers’ left to move the stock. And when you buy options into earnings, you want a big move in your direction. So tread carefully. (by the way, if you’re into options, make sure you sign up for Doug Robertson’s webinar) 5) Respect Price As of late, we’ve seen a lot of market commentators making “what goes up must come down”-type arguments against the market. Yes, we’ve come a long way since the Brexit bottom. But that’s been for good reason. Earnings season has not been as bad as expected, and economic data has generally been pretty decent. You must always remember the biggest lesson Mr. Market likes to teach — that price trends tend to last a lot longer and go further than may seem reasonable. So always respect price… even when it seems crazy. Remember, the most important question in markets is now who, what, why, or how. It’s WHEN. A great thesis means zero without equally great timing. So avoid a rush to judgement when it comes to price.
Continue Reading -->The Morning Hammer: Weak Oil Means Nothing to This Bull
I’ve been out since last Thursday to get my eyeballs upgraded but not much has changed. When I’m not working, I make a point of not looking at the market or reading anything related to it. But I didn’t miss a thing. Crude oil is still deteriorating, yet SPX cracked yet another all-time high. The index has been consolidating in a remarkably tight range between 2160ish and 2180ish. I’ve been predicting that the market would head into a snoozefest like the one in April-May, and we’ve been getting it thus far. Futures are down slightly on weak earnings from Germany’s Commerzbank and a smaller-than-expected spending package from Japan which is sending the yen up. As you probably know, a strong yen means risk-off, though US markets have been yawning at everything including the kitchen sink. Sentiment is cooling off just a smidge. The ISE Sentimenmt Index fell to 72 yesterday and hasn’t been over 100 since July 18. That means call option demand is waning a bit, a good sign for the bulls because it means we’re still digesting and doubt is building. Pfizer (PFE) beat analysts’ expectations but is trading off slightly. We’re also seeing good numbers out of CVS (CVS), Procter & Gamble (PG), and Shire Plc. Watch closely to see how the pharma/biotech complex reacts. We’ve got some big economic data points on tap today, with Personal Income/Spending and the PCE Deflator (the Fed’s preferred inflation measure) on the way. As of late, US economic data has been generally strong relative to expectations, though Friday’s GDP report was lousy. Check out the chart below of the Citi US Economic Surprise Index: I added the UK index just for the fun of it so you can see that the Brexit impact hasn’t been that bad so far: Now, what’s interesting is that the weak GDP numbers turned traders a little more dovish. Fed Funds futures now imply a 36% probability of a December rate hike, down from 48% last week. Strong economic data this morning could flip it back. As I’ve been emphasizing, perceptions of the Fed’s forward path are EXTREMELY volatile. Remember, after the Brexit, traders priced in a 9% chance of a December rate hike. And in less than a month, that number was up to 50%. So if you’re trading bonds, golds, forex, or anything else that’s rate-sensitive, you may be in for quite a ride. Good luck friends.
Continue Reading -->Fed-Induced Breather or Run of the Mill Digestion?
Global markets are flashing slightly red this morning despite yet another whopper of an earnings report from Facebook (FB). Facebook is around $130 and making new record highs, and I’m asking myself why I ever sold this stock. It’s especially impressive in the face of Twitter’s (TWTR) struggle to just meet its own guidance. NDX futures are slightly in the red, as are SPX futures. Overnight, Euro-area economic confidence beat expectations and German and Spanish unemployment declined. We’ve talked extensively about how post-Brexit data has been beating expectations, and the trend continues. Of course, this plays right into a conversation about the Fed because the Brexit has been a source of concern. Yesterday, the Fed said it is less worried about near-term economic risks, which wasn’t a total surprise given the aforementioned data trends. Some folks are attributing today’s little slump to the Fed’s little hawkish twist, but I’m not buying that for 2 reasons: 1) The dollar actually FELL and gold rose after the release of yesterday’s Fed statement, showing that traders still think the Fed’s going to move slowly. The perceived odds of a Fed rate hike have risen, but perhaps not enough just yet. The dollar and gold are also following through on yesterday’s moves. 2) We’ve come a long, long way. The SPX is up 166 handles from the post Brexit lows and the FTSE 100 is up even more on a percentage basis. (see chart) This little sideways grind feels more like run-of-the-mill digestion, which I think could continue. I see August as being similar to the April-May snoozefest that bankrupted hordes of aggressive put options buyers. SPX barely budged yesterday, but there were some positives below the surface. Tech (inspired by Apple’s (AAPL) big earnings report, biotech, and small caps al did quite well, even with another big drop in crude oil. Crude oil is an important driver of risk sentiment and fundamentals (it heavily impacts earnings and high-yield energy bonds), so I’m a bit puzzled at how the market yawned at a near-20% drop in WTI crude. The big question I’m asking now is whether the good news we’re getting (solid economic data, huge earnings from AAPL and FB) is coming just in time for a short-term top. In my mind, price leads news (or as Mr. Jeff Cooper says, the news breaks with the cycles), so I’m wondering if this nice little streak of happy news is justifying all-time highs after the fact. We’ve got Amazon (AMZN) and Google (GOOGL) hitting after the close today. Should both of them beat, it will be interesting to see if that inspires real buying. For now, we still feel stretched and sentiment is positive, but you can’t argue with price — the bulls are holding strong. Good luck friends.
Continue Reading -->The Morning Hammer: Apple Smashes Bears, Record Nasdaq Highs in Sight
Global markets are in a happy mood courtesy of Apple’s (AAPL) better-than-expected earnings report, and Japan’s signaling of more stimulus. Apple is up ~$6.50 in the early going after beating analysts’ earnings, revenue, and iPhone unit estimates, and offering strong forward guidance. Meanwhile, just as traders thought Bank of Japan stimulus was priced in (based on yesterday’s big rally in the yen), PM Shinzo Abe showed commitment to a $265 billion stimulus package. That’s pushing the yen back down, which is great for risk appetites. SPX futures are slightly green, while NDX futures are up 0.7%. If Apple generates some follow-through among other large-cap techs, we could see a new Nasdaq Composite all-time high above 5231.94. And the NDX may finally exceed its March 2000 high of 4816.35. Facebook (FB) reports after the close, and if it repeats another blowout, maybe we see those records fall by the weekend. In related news, Twitter (TWTR) dropped another guidance stink bomb last night and is getting smashed up. Meanwhile, Fiat Chrysler raised its forecast, and Comcast (CMCSA) and GlaskoSmithKline beat. Crude oil is down after the API showed a very small decline in crude oil inventories after the close yesterday. EIA data hits at 10:30 a.m. ET. Economists expect a 2 million barrel decline. We also have durable goods, pending home sales, and of course, the FOMC rate decision. Fed Funds futures show that traders are pricing in a mere 10% chance of a rate hike today. The forward outlook will be key. I would pay close attention to see if the Fed eases up on its concerns over the Brexit, given that global economic data has been generally strong as of late. Lately, I’ve been emphasizing that perception of the Fed, which impacts all financial markets, is incredibly volatile. Ths is especially true this year. 2 months ago, traders were pricing in a 74% chance of a December rate hike. That number dropped to 10% chance after the Brexit. Now those odds are back up to nearly 50%. And we act like Tesla (TSLA) is volatile… Now one thing I found really interesting yesterday was the action below the surface in biotech. IBB was red because of Gilead’s (GILD) weak earnings report and big decline. Yet XBI, which is much more diversified (GILD is 8% of IBB), was actually well in the green. So below the surface, biotech was strong (as was the Russell 2000) on an overall snoozer of the day. So pay close attention to biotech — if it turns out to be a coiled spring, the bulls might party like it’s 1999. And 1999 was a good year!
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