by Option Review - December 10th, 2013 4:51 pm
by ilene - December 10th, 2013 4:03 pm
Courtesy of Wade at Investing Caffeine
There has been a lot of hyper-taper sensitivity of late, ever since Fed Chairman Ben Bernanke broached the subject of reducing the monthly $85 billion bond buying stimulus program during the spring. With a better than expected ADP jobs report on Wednesday and a weekly jobless claims figure on Thursday, everyone (myself) included was nervously bracing for hot November jobs number on Friday. Why fret about potentially good economic numbers? Firstly, as a money manager my primary job is to fret, and secondarily, stronger than forecasted job additions in November would likely feed the fear monster with inflation and taper alarm, thus resulting in a triple digit Dow decline and a 20 basis point spike in 10-year Treasury rates. Right?
Well, the triple digit Dow move indeed came to fruition…but in the wrong direction. Rather than cratering, the Dow exploded higher by +200 points above 16,000 once again. Any worry of a potential bond market thrashing fizzled out to a flattish whimper in the 10-year Treasury yield (to approximately 2.86%). You certainly should not extrapolate one data point or one day of trading as a guaranteed indicator of future price directions. But, in the coming weeks and months, if the economic recovery gains steam I will be paying attention to how the market reacts to an inevitable Fed tapering and likely rise in interest rates.
The Expectations Game
Interpreting the correlation between the tone of news and stock direction is a challenging endeavor for most (see Circular Conversations & Tweet), but stock prices going up on bad news has not a been a new phenomenon. Many will argue the economy has been limp and the news flow extremely weak since stock prices bottomed in early 2009 (i.e., Europe, Iran, Syria, deficits, debt downgrade, unemployment, government shutdown, sequestration, taxes, etc.), yet actual stock prices have chugged higher, nearly tripling in value. There is one word that reconciles the counterintuitive link between ugly news and handsome gains…EXPECTATIONS. When expectations in 2009 were rapidly shifting towards a Great Depression and/or Armageddon scenario, it didn’t take much to move stock prices higher. In fact, sluggish growth coupled with historically low interest rates were enough to catapult equity indices upwards – even after factoring in a…
by phil - December 10th, 2013 8:08 am
Nothing but blue skies on our Big Chart this week.
The S&P came within inches of making a new all-time high and the Nasdaq made their new 13-year high while the Dow, NYSE and Nasdaq also reach for the skies in what David Stockman calls:
"The kind of speculative froth you get at the top of a cycle where valuation loses any anchor in the real world; from earnings or the prospects of the economy."
Well, Jimmy Crack Corn and we're in cash (so we don't care) but just yesterday, both Bullard and Fisher from the Fed said tapering is on the table at next week's meeting (but Fisher always says this) and,. more notably, Gov Lacker also said it would be discussed. Discussion is not action but we may be getting close.
While the official unemployment reports have us down to 7%, the chart on the left from Zero Hedge gives you a much better idea of what's going on in the real World. The number of employees actually working at the 2,000 companies that make up the Russell has dropped by 50% since 2007 and has made little, if any recovery since bottoming out in 2011.
The index, however, is up 169% since the 2008 low so the message to corporate America is clearly to cut the dead weight (employees) and don't go back to the old ways. "America's Economy is Officially Inside-Out" says the Harvard Business Review, with the top 1% making 95% of the gains in this so-called recovery. According to HRB: "The plain fact is that the average household is poorer in the “recovery” than during the “recession.”
When growth rises and living standards fall, that begins to hint that there is something wrong—very wrong, perhaps terribly wrong—with the way things are. It suggest that what is happening to this society is not merely a simple, passing, self-healing ailment; but a chronic, possibly permanent, definitely debilitating condition. Not a flu—but a cancer.
by Sabrient - December 9th, 2013 7:12 pm
Today, with very little market moving news, the S&P 500 closed at 1808.4, yet another new closing daily high. The index did touch the 1811 area on at least three distinctly different time slots creating a new resistance level. But after last week’s bevy of positive economic surprises, the sharp gain of 1.1% on Friday, leaving the index just a tiny point away from its ninth consecutive up week, we can’t be too quick to suggest today was a topping rally. For one thing, volume was quite low as traders seemed to be trying to sort out the odds on the earliest date of Fed tapering. Estimates range from this month to March and even later. But it’s going to happen…so why so much emphasis on when? Perhaps protection of end-of-the-year profits in so many fund managers portfolios? I would bet on that.
Before we leave last week, we should note that the small caps finally had a slowdown with the Russell 2000 down nearly 1%. Mid-cap Value led the style/caps, up 30 basis points. Sectors had an unusual week led by Technology, up 0.72%, followed by Utilities, up 0.29%. You read that right; Technology #1 and Utilities #2. I don’t recall that happening before. Consumer non-Cyclicals was the only other sector in the black, up 0.15%. That sector is frequently pared with Utilities, so its performance is not such a big surprise. Energy, Consumer Cyclicals and Telecom were at the bottom. It all makes sense for a cautious market except for Technology’s leadership. Investors seem to be torn between caution and end-of-the-year window dressing.
This week offers very little in the way of important economic indicators other than Thursday’s Retail Sales, the weekly peek at Initial Jobless Claims to see how real last week’s 298K figure was, and Business Inventories. Most corporate quarterlies are already out there. So, we are left to consider the reality in last week’s rumors that a budget deal might be forthcoming. What a present that would be from our much maligned Congress!
Caution remains a major thought for this market. Technology, Financials and Basic Materials are the top of our sector shopping list, but the real key is finding undervalued companies projected to grow regardless of their sector.
3 Stock Ideas for this Market
by Option Review - December 9th, 2013 4:26 pm
OSIS – OSI Systems, Inc. – Options volume on OSI Systems today is well above the average daily level for the stock, with upwards of 7,500 contracts in play as of midday in New York versus average daily volume of 57 contracts. The surge in options trading on OSI Systems coincides with a 40% decline in the price of the underlying shares to $39.00 today, the lowest level since October of 2011. The company provided an update on a recent $60 million order cancellation by the Transportation Security Administration (TSA). Call options are more active than puts, with the call/put ratio hovering near 2.0 as of 12:40 p.m. EST. Some traders appear to be selling out of the money December and January 2014 expiry calls, while others step in to buy the contracts perhaps in the expectation that shares rebound in the near future.
by Sabrient - December 9th, 2013 11:42 am
“Experience is not what happens to a man. It is what a man does with what happens to him.” -- Aldous Huxley
Wall Street made a nice little recovery on Friday, as positive jobs numbers helped bring the major indices a lot closer to break-even for a week that seemed destined to end up substantially in the red.
Still, in spite of the biggest single-day gains in seven weeks, both the Dow Jones Industrial Index (DJIA) and the S&P 500 Index (SPX) suffered their first losing week in nearly two months.
For the week, the Dow shed 0.4% and the SPX dropped 0.1%. The Nasdaq Composite (COMP) managed to squeak into the black, however, gaining a miniscule 0.1%. More significantly, it ran its winning streak to four weeks in a row and hit highs that haven’t been touched by the tech-laden index since the heady, bubbly days of 2000.
The economic report that sent the market closer towards its recent strong upward trajectory was from the Department of Labor, which announced that November’s unemployment rate was the lowest since the start of 2009.
Of major interest from an investor’s perspective was the fact that the good news on the jobs front was not countered by fears that the Fed would now become emboldened to initiate its tapering of the current bond purchasing program.
The $85 billion per-month program has been credited by a number of economists as a key factor in driving the equity market up to its current record-breaking highs.
This “good-news-is-bad-news” cycle has been in place, to a certain degree, for most of the last several months as investors perceive, correctly or not, that good economic news will provide the Fed with appropriate cover to pull back, or entirely curtail, the current stimulus program.
Maybe it’s the holiday spirit, but in any event, investors seemed to decide en mass to discount the potential impact of the report on the Fed’s decision regarding the tapering timing.
This sentiment may change as next week’s Fed policy meeting draws closer, and therefore becomes more prominent on investor’s radars.
In the meantime, the phenomena of yet another Santa Claus rally seems to once more be rearing its rosy head.