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Follow-Up: Technical Trouble on the S&P 500 (SPY, GS, JPM, AAPL, CSCO, GOOG, F, GE, CAT, GLD, UUP)
We have posted discussions about this in the past, most recently on November 25th and also on October 30th, where we looked at the charts and decided that the S&P 500 was possibly in for some trouble. On November 25 the broad market index closed at 1111.18, and today it closed at 1091.94, for a loss of 1.7%. Basically, the market has gone nowhere in that time.
What has happened, however, is that the chart has given us some more signs that the market is running into trouble. Here is a 1 yr daily chart of the SPX, similar to the one we showed in our previous posts, except with some updated lines.
As you can see, we still remain unable to break above that 1120 line (yellow horizontal line), which is the long term 50% Fibonacci retracement line from the 2007 high to this years low. It is likely that we are seeing heavy resistance at this level as traders anticipate this weakness and front run it to exit positions for the year.
Additionally, this chart shows that we have broken the uptrend that was established since the March lows. Keen observers will note that this also happened in October, but the break is much more definitive this time especially when combined with that price ceiling. However, we will need to take a look at where we close on the weekly chart because that should be much more indicative of future movements.
For good measure, the same analysis applied to the E-Mini futures (/ES) yields similar results:
The /ES is attempting, and thus far failing to break through its own ceiling which has been established at 1112. As you can see, the E-Mini futures just broke below the upward trendline that has defined this rally since March.
The root cause of this is, in our opinion, fund managers selling off risky assets to lock in the substantial gains some of them have been able to accumulate during this tumultuous year. Obviously, this situation is not sustainable, as mutual fund managers often have a mandated maximum cash balance, and hedge fund managers generally do not like to have their end-of-year statements to clients say that they are in cash. But there is a lot of money available to be taken off to the sidelines, so this situation may continue through the end of the year. It will be important to watch leadership stocks over the next couple weeks such as Goldman Sachs & Co. (GS), JP Morgan Chase (JPM), Apple (AAPL), Cisco, (CSCO), Google, (GOOG), Ford (F), General Electric (GE), Caterpillar (CAT), etc. and of course gold (GLD) and the US Dollar (UUP). We’ll be making a follow up to this over the weekend.
-Lucid Markets Team
Disclosure: Long GS, CSCO, GOOG, GE, GLD, UUP, JPM and the stock market in general through various other positions.
Stress Tests…Not Stressful Enough (JPM, BAC)
Banks are lining up behind the camera
Before launching into this, I want to apologize for the lack of posts from me. My family had an emergency, and I had to schedule a last minute trip to London, where I am currently (yes, before you ask, it is raining).
Anyway, I have been trying to keep up with the latest news whenever a useful Wi-Fi network popped up and lit up my iPhone. Of course, the headline unemployment figure has been generating a few headlines since it came out this morning, and I thought I would take this opportunity to post and comment on a story I read on The Market Ticker blog concerning the relation to the scenarios presented in the government’s stress tests and reality, which can be found here.
Of course, we have known that the “more adverse” scenario presented in the bank stress tests has long been surpassed as the economy continues to underperform. In the government’s worst-case scenario, unemployment would not exceed 8.9% this year, and 10.3% in 2010. And yet the numbers presented this morning show an unemployment rate of 10.2% already before 2009 is even completed.
I have said this in previous posts, but I do believe it bears repeating: The run in the market, and especially the banks, is not sustainable until we see some meaningful recovery in unemployment and consumer confidence. With the consumer feeling a bit glum, and banks such as JP Morgan Chase (JPM) and Bank of America (BAC) struggling and increasing their consumer loan loss provisions, the market seems to have correctly predicted another of its famous phantom recoveries.
-AH
Disclosure: Long JPM
Earnings Wrap-Up (INTC, JNJ, ABT, JPM, IBM, GOOG, GS, C, BAC, GE)
What a week… We saw saw the Dow break above the 10,000 barrier and some of the biggest and most influential names in the market have reported a mixed bag of earnings that have been interpreted in an equally mixed way.
Intel (INTC) posted great numbers and although they rocketed up on the news, they have since given back all of the gain and then some. Buying on the good news would have hurt and they also set the earnings bar high for other reporting companies.
Earnings: Beat
Revenue: Beat
Johnson & Johnson (JNJ) in my opinion posted ‘Good’ or ‘Very Good earnings’. Unfortunately the street was looking for ‘Great’ and the shares received a 2.5% slap on the wrist. I recently purchased JNJ towards the end of September at $61.38 because I have been trying to take a more defensive posture as we continue at these high levels on the S&P 500. I still stand by these convictions although I wouldn’t pull the trigger to buy more unless it fell into the mid 50’s.
Earnings: Beat
Revenue: Miss
Abbott Labs (ABT) is another diversified healthcare company we own that has a nice healthy dividend of % but has been lagging the market since the bottom in March. Their earnings were well received after the lowered bar from JNJ, who stated that consumer defection to generic drugs were a big contributor to the disappointing sales numbers.
Earnings: Beat
Revenue: Beat
J.P. Morgan & Chase (JPM) posted fantastic earnings across the board, setting the bar high for its competitors as earnings season plays out. Revenue leaped to $26.62 billion from $14.74 billion, and their Tier 1 capital ratio jumped to 10.2%, up from 8.9% in the year ago quarter. The bank has expressed some misgivings about the future, and has increased its consumer lending loss provisions by over 60%, and non-performing assets have more than doubled since Q3 2008.
Earnings: Beat
Revenue: Beat
International Business Machines (IBM) reported what I felt were good numbers but not enough to justify the bidding up of their shares leading into earnings. IBM still looks very strong fundamentally and I think this bad reaction to their earnings can be used as an opportunity to accumulate (more on this in a later post).
Earnings: Beat
Revenue: Miss
Google (GOOG) reported fantastic earnings, beating the street in both profitability and revenue. Customer paid “clicks” increased both sequentially and year-over-year, but the average price paid per click by advertisers fell. CEO Eric Schmidt said the worst of the recession is behind them, and that the company could make one or two “big acquisitions” per year from here on out. Their revenues grew substantially and their Traffic Acquisition Costs (TAC) fell during the quarter.
Earnings: Beat
Revenue: Beat
Goldman Sachs (GS) posted fantastic profitability, but revenue levels were enough to concern the street. Nearly all sector revenues were down sequentially, except for trading and asset management which benefited greatly from the 15% rise in the markets during the quarter. Going forward, GS will benefit greatly from being the strongest Investment Bank due to greatly diminished competition, but will be hurt in its strongest business if the markets go south again.
Earnings: Beat
Revenue: Beat
Bank of America (BAC) posted poor earnings, slipping to a loss of $.26 per share compared to a profit of $.15 in the year ago quarter. This highlights the ongoing struggle of consumer banking, as it deals with high unemployment and increasing amounts of non-performing assets. In this light, the company announced it has increased its loan loss provision account to $11.7 bn, up from $6.45 bn a year ago.
Earnings: Miss
Revenue: Miss
General Electric (GE) reported great profitability, but poor revenues causing traders to drive the stock down 5%. GE Capital was the main anchor on the company, with its profit declining 87%, but surprisingly NBC Universal was a bright spot with a 13% rise. Jeff Immelt talked of a tough environment (he noticed!), but that he saw signs of stabilization in GE Cap.
Earnings: Beat
Revenue: Miss
Overall, it looks like the previously strong companies are getting stronger (GS, JPM, GOOG, INTC), while the environment remains troubled for companies who have underlying issues (BAC, GE). IBM dropped after reporting but we view the results positively.
Lucid Markets Team
Disclosure: Long: TSM, JNJ, ABT, IBM, GOOG, GS, BAC, GE, IBKR, JPM
Playing With Fire – UltraShort S&P 500 (SDS, SH, SKF, QID, INTC, JPM)
“When the facts change, I change my mind. What do you do sir?” – John Maynard Keynes
I bought SDS before the close yesterday (10/13) after looking at one of my more reliable long term technical indicators which predicted a fairly serious iminent fall in the market. Combined with the fact that Intel (INTC) and J.P. Morgan Chase (JPM) were reporting after the close and in the morning made me want to get some protection.
Their earnings not only had high expectations, but they are also bellwether of their industry and of the overall market. Had anything not gone off perfectly in their reports, the results would most likely have been bad with a run down to at least 1030 on the S&P. I also felt that Dow 10,000 could pose strong psychological resistance in the market
That being said, I heeded the wisdom of Mr. Keynes and covered the position early in the morning after anticipating a half gap fill. In the end I only lost 1.7% (including trading fees) on a trade that could have returned at least 5% easily. I also put on additional long positions which I will get into later.
-MJB
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Lucid Markets 
Reviewing Our 2009 Trades (AAPL, RIMM, GS, JPM, MS, SHAW, BNI, BAGL, PALM, GRMN, VXX, SH)
Some That Went Well:
B SHAW @ 28.20: I bought the Shaw Group (SHAW) on October 16, a day where they got hit hard by a number of events. Shaw just announced earnings which beat expectations, taking their stock to $32.36, for a return of about 16% in 3 months. I saw them then, just as I do now, as an undervalued and under-appreciated infrastructure play with a nuclear energy kicker.
B BNI @ 79.20: I bought Burlington Northern Santa Fe (BNI) on October 1. I was looking at a cyclical play as the economy recovered, I figured that rail was going to see a huge rebound as the economy recovered. What would be the chief driver of this? The efficiency of rail, as energy prices rise (another bet I am taking), rail will become more and more attractive relative to other methods of over-land material shipping. Towards the end of last year, Warren Buffet announced that he was buying the rest of the BNI shares he didn’t already own for $100/share, and the stock rose to that level generating a return of 26% in 2 months. I eventually sold that position instead of receiving the equivalent in BRK.B shares.
S PALM @ 17.40: I nailed this one. I didn’t own the stock, so I couldn’t sell it, but had investors heeded my warning they would have saved themselves from 34% of downside given the current price of $11.45. I wrote this as PALM was riding high on the prospects for the Pre smartphone, but I saw the dark clouds on the horizons. With Google releasing their Nexis One yesterday, if puts another nail in the coffin of Palm’s WebOS, as the ability for manufacturers to customize Android, and the immense Apple App store, give massive advantages over Palm’s new system.
S GRMN @ 37.63: This is another one that I didn’t own and so couldn’t sell, but the stock is now 17% below the price at which I recommended selling. Again, this is smartphone related as GRMN released their Nuvi to much hype, but little substance. GRMN is losing marketshare to smartphone applications like on the iPhone, Motorola Droid and Google Nexis One, and this is a trend that will continue. The Nuvi was supposed to help, but it was a confused hybrid between stand-alone GPS and a smartphone that made a mess of both functions. Investors will do well to continue to stay clear.
B RIMM @ 56.60: Mike nailed this price for RIMM. He used discounted cash flows analysis to determine that it was severely undervalued, and that turned out to be the case. RIMM is currently trading at approximately $65, for an upside of about 16% in the 2 months since his article was published. RIMM is the biggest player in the smartphone market, and their strength will likely continue as they release new products that are competitive with the other market leaders.
S RIMM @ 83.60: Again, Mike nailed this one. With a current price of $65, Mike saved himself and any readers who heeded his warning from 28% of downside over the course of 3 months. His hypothesis was that expectations for performance had outstripped actual results, and that was the case as RIMM reported earnings that disappointed.
There was also Mike’s December 17th post, on Meredith Whitney’s calls on Goldman Sachs & Co. (GS), Morgan Stanley (MS), and JP Morgan Chase & Co. (JPM) where he proposed that it would likely be profitable to ignore her calling considering that the stocks had already fallen quite a bit and that even with her lower earnings estimates, they still represented great values at their prices at the time. Mike has so far been proved correct, and all three are up by 10%, 13% and 11% respectively in the two weeks since his post. All returns are more than doubling the 4% gain of the S&P 500.
And Some That Did Not Go So Well:
B VXX @ 48.30: The problem was not the argument, but the vehicle chosen to execute that argument. VXX is an ETF that is designed to follow the short-term VIX futures contract price. The problem is, it doesn’t. Since my article was posted, this ETF is down 37%. Luckily I got out pretty quickly (at $45.96), but in retrospect this was a horrible idea.
S AAPL @ 189.59-190.00: Our hypothesis on this article (which incidentally got us a note from Apple’s lawyers…check out the original post) was that AAPL had fully priced in any future good news, and was excluding the possibility of poor performance. A week after our original article, Apple released record earnings, and the stock shot up to above $200. It has shown volatility since then, but now stands at $210 for a missed upside of about 10%. We stand by our convictions, but with the utmost respect for AAPL’s continued performance.
B RIMM @ 70.07 and 67.20: After RIMM missed earnings on September 25, the stock dropped by 15% in a day. I bought that dip, and Mike bought a few days later. I underestimated the investor disappointment concerning earnings, and bought way too early. The fallout from earnings hadn’t happened yet, and the stock would eventually settle in the mid $50s before recovering. At its current price of $65, the decline isn’t so painful but it definitely hurt for a while.
B BAGL @ 10.12: Mike found this one while searching through relatively unwatched industries for low-beta stocks that were severely undervalued on a cash flow basis to their peers. It is currently down only 4% but this is following a more than 11% gain off of where it fell in the mid-8’s. Einstein Noah Restaurant Group continues to trade at less than half a years revenue even though the company is still growing. Mike still feels it offers a very compelling value especially compared to it’s peers, however, he recognizes that it was probably a mistake to dive in until there was a potential catalyst to drive the stock higher considering that they don’t even pay a dividend.
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I hope readers find this constructive. I find it is helpful to go back and learn from both your mistakes and successes. In general, I feel that we have done quite well in picking stocks on both sides of the trade.
-AH
Disclosure: Andrew is long RIMM and SHAW. Michael is long BAGL, BAC and net long the market although currently building a position in SH.