…Big Ben was out of the picture due to a minor injury but our backup quarterback after two bad downs following Ben’s ’sack’, dropped back and threw a surprise Hail Mary…unusual this early in the quarter but guess he felt we needed to get some momentum…wide receiver had a DB and cornerback on him with safety closing in and miraculously hauled it in before being tackled on the Bears 35 yardline…a 70 yard play that had the fans cheering….now if we can just score at get back some of that 28-3 diff. Then if Big Ben can come back with something we might be able to win this yet…there is a lot of the half left!
If you detect a sense of optimism from TB, you are spot on…OK as optimistic as TB can get under the circumstances…it ain’t pretty but compared to this time yesterday morning when Dow futures were -111 at least there is hope…just don’t bet the farm on it! Now let’s review what happened…crude was strong over Iran concerns and the only hope we had was that it was a new quarter that typically has a bounce…in the two prior end of quarter and year selloff’s the one after year end just kept going but on April 1 we had a nice rally, remember?…come on, give TB credit for his observation on how the hedgies can short at will after the last T+3 trade date for the quarter…that is three straight now and the reason makes sense: most hedge fund have poor returns…not to mention their high fees…but if they can make their conventional money manager brethren look bad, that is no small victory! Better watch for this again at the end of this quarter! TB will!
Market floundered after a few attempts to rally yesterday then declined with the Dow falling about 165 before a better than expected ISM Manufacturing Survey gave it cause to reconsider…as capitulation trades go it was not like what we saw on January 22 or even March 13, but despite concerns we scored a 32 point gain. That was no small feat. Of course, we could have seen shortcovering only so today is doubly important. As weak as the market is we might be able to get a 500 point gain to 11850 and on some good news perhaps keep going from there…but Thursday we have what promises to be a weak payrolls report followed by the long weekend…still there shouldn’t be as much willingness to short a thin market. The good news however was that volume was well above the 1.3B average since 3/24 and even the normal 1.5B shares coming in at 1.64B shares yesterday! Better still it was steadily stronger as the rally continued after starting out the day in pretty normal fashion.
There were three other positives: the Dow bounced after putting in a new cycle low and both Nasdaq indices had outside days (the only drawback is that on alternate days the movers are the same stocks with just a different sign, even the magnitudes are similar…examples: AAPL, QCOM, RIMM, XOM and on the AMEX the only two stocks that consistently show up as movers and dictate the move in the entire Composite -BTI and IMO); the second was that despite continued bad news for financials the sector was unchanged while banks showed gains of more than 1%; lastly, and most importantly is volatility…look at the two options indices:
VIX – the S&P 500 – 25 is the pain threshold yet it has remained below it thru the entire selloff, it dropped thru it on the April 1st rally and has been way below it but spiked to 25.57 yesterday then snapped back to close at 23.65…a very important reversal.
VXN -Nasdaq 100 - 30 is the key level here and it began to oscillate below it on March 26 (last day in March for T+3 settlement) and also closed below it on April 1 only trading above it on June 30 and yesterday spiked to 30.91 and also reversed to close at 28.73.
So? Those of you who have been paying attention know that for nine months or more significant options strategies have been implemented whereby a straddle is put in by owning the underlying stock and trading the range, then buying an out of the money call and an out of the money put. By doing this, if your position is stopped out by the stock not staying within the trading band, and then breaks out, the option keeps you in the game…and the same goes at the bottom by providing the put protection…by buying these two options at the bottom of the band (the call above the top of the band) and the top (a put below the bottom of the band) it is a very inexpensive strategy for a large fund to carry out. To TB this explains why options volatility remained low even as we were near cycle lows on the major indices and is the only thing to make one believe that things may not have been quite as dismal as they appeared.
The test of course is if the rally can continue and that means looking at the trading bands on every stock or ETF to determine when you should cut back positions because make no mistake, this will only be a countertrend rally as it was in January and March but one that could have significant legs. So the key is at the right point to cut your losers. One other problem is that stocks and bonds have not been able to offset one another’s performance so you need to decide where you want to align yourself on that argument.
There is an important Bloomberg story out this morning on how small banks have dried up on lending because their access to the auction rate securities market has withered…this is very important since it will greatly impair the ability of small businesses to borrow…not to mention the flailing mortgage market. Data just out shows delinquent home equity loans at the highest level since 1990.
Also watch Berkshire Hathaway today as they just had the worst first half since 1990 due to the insurance segment which they are heavily involved in…see they aren’t above the fray either!
Healthcare and Pharma will increasingly come under scrutiny as we head towards the elections with major reforms likely in both. United Healthcare just settled and $895M lawsuit and lowered earnings forecast.
If you like emerging markets…even today with Europe rallying and the US in a continuation on Globex, Asian markets are very weak…the only exception is the battered India which rallied 5.4% on Infosys and others seeing increased software sales…Infosys India +6% …the ADR INFY could be worth watching today.
Now for a positive of sorts: the NYNEX announced increased margin requirements yesterday for crude and related contracts effective close today! This could take some pressure off crude…also there is a story that Iran is caving on its nuclear fuels policy…time will tell. Now if only the CFTC would enforce limits on banks that are writing derivative commodity swaps to index funds which are being inundated by money flowing in from public pension funds…how they say it is important and somebody has to be hurt and hurt badly but if that is the price to maintain global economic stability so be it. Just recognize that the cure could be as bad as the disease in the short run but the longer they wait….too bad they didn’t do this months ago when the problem erupted.Had they done so we crude might be $100 or even less. A little regulation goes a long way.
Hope that today’s commentary is useful and that it invigorates you to review your portfolio…what better time then at the beginning rather than the end of the quarter?
Today marks the first time in since mid-May that TB has felt any optimism and hopes it is warranted. It was a horrible June and references to it being the worst since 1930 did not help. We have far too many problems on our plate and it is imperative we do something about them. The worst part is we have a lame and lame duck administration who has not shown any regulatory ability in seven years and yet we expect them to do so now? A Congress that is manipulated by lobbyists until it reaches crisis stage and an election, and will likely pass horrible laws resulting in overkill.
TB
