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WTF Wednesday – Markets Keep Going Higher for No Real Reason

This could be the short of a lifetime.

Once again we're over 3,000 on the S&P 500 – at 3,035 early this morning and 3,030 now, at 7am and it's RIDICULOUS because 2020 earnings are forecast (even WITH re-opening now priced in) to be $128.49 for the S&P 500 so, at 3,030/$128.49, you are paying 23.5 times earnings for 2020 and next year – even if we do improved to $164.26, 3,030 will still be 18.4x earnings.

While 18.4 doesn't sound terrible, historically, the S&P 500 trades around 15x earnings or 2,464, which is where we were in 2018, when the S&P was making $161.46.  In 2015 and 2016, the S&P was trading at 2,100 and earnings were $119(ish) – that was 17.64 – a bit high but tolerable.  23.5 is 33% above 17.64 – 33% more than tolerable.  If it were a stove, you'd say ouch but probably not a severe burn but any higher than this and, like Icarus, this market will burst into flames.

So, WTF is going on with the S&P and the market in general, for that matter?

Well, the Government is pumping $6.7Tn into the economy and that's about 1/3 of our normal GDP, so we should be able to breeze through 4 months of suffering with only the hangover you get from having $26Tn in debt to pay off one day. 

Bailout: An Inside Account of How Washington Abandoned Main Street ...Since we haven't had anything near a total GDP wipeout (revision to Q1 comes Thursday, Beige Book today) and we're already re-opening, there should be PLENTY of money sloshing around to provide liquidity for a rally but it was applied in a very mess, haphazard manner and really only benefitted the Top 1% (as most things do these days) while there is still a lot of suffering for small business and individuals.

And, of course, there are many people, including the President, who seem to believe the virus is gone and won't be back and the re-opening is a huge success – all with very little evidence backing it up.  

What's real and what's not remains to be seen but one thing I do know is real is earnings and MATH is also very, very real and the math we apply to the earnings tells us the S&P 500 and the other indexes are historically over-priced – even for a market that isn't hanging under the threat of a Global Pandemic, a Trade War between China and the US, Explosive Debt, Massive Unemployment and waves of Small Business Bankruptcies and Loan Defaults still to come. 

Traders may choose to ignore these things but investors should not.

We will continue to adjust our hedges to lock in the gains from our long positions.  I'd rather sacrifice 1/3 of the upside than watch the whole thing evaporate if this fantasy begins to unravel and the wax melts in Icarus' wings – we all know how that story ends.

icarus | via Tumblr shared by manu on We Heart It



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  1. Good Morning.

  2. Good morning, All!

    Yup… it's Wednesday! Join Phil at 1pm, here:

  3. Phil / WBA -

    I have  50X of the '22 $35 calls uncovered , the '22 $50 Calls are now at 4.2 – should this be covered now ?   This was rolled last week.

    50X '22 $35 Calls ( 8.2) 

    20X '22 $40 Puts (8.8)

    Partial cover 25X '20 $42.5 Calls ( 1) 

    Thanks for your help.

  4. Good morning! 

    Well, that was a quick sell-off…  Doesn't matter until it goes below yesterday – it's yesterday that was BS – as I said at the time.  SPY volume has been way off for the last two weeks:

    Date Open High Low Close* Adj Close** Volume
    May 27, 2020 302.12 302.22 299.57 299.90 299.90 13,915,399
    May 26, 2020 301.93 302.19 295.46 299.08 299.08 88,595,700
    May 22, 2020 294.57 295.63 293.22 295.44 295.44 63,958,200
    May 21, 2020 296.79 297.67 293.69 294.88 294.88 78,293,900
    May 20, 2020 295.82 297.87 295.57 296.93 296.93 85,861,700
    May 19, 2020 294.35 296.21 291.95 291.97 291.97 95,189,300
    May 18, 2020 293.05 296.75 292.70 295.00 295.00 120,320,200
    May 15, 2020 282.37 286.33 281.34 286.28 286.28 111,146,300
    May 14, 2020 278.95 285.11 272.99 284.97 284.97 121,977,900
    May 13, 2020 286.06 287.19 278.96 281.60 281.60 144,721,10

    That's NOT how you make a high that's going to hold.

    I have my normal /ES shorts, of course, stop line is now 3,000.

    Nasdaq taking the most damage:

    "Yesterday's gone, yesterday's gone" – Fleetwood Mac

    How was that one of the biggest hits of all-time?

    WBA/Batman – Well, in the LTP we did this:

    WBA – Before VIAC, I was sore from banging the table on WBA  and so far, so wrong on this one but now we can roll our 40 2022 $40 calls at $6.20 ($18,175) to 50 of the 2022 $30 calls at $10.60 ($53,000) buy back both sets of short calls ($9,520) and sell 25 July $42.50 calls for $1 ($2,500) as those expire before earnings.  That's going to cost us $41,845 and we started at $11,750 so we're in 50 of the 2022 $30 calls for $53,595 and that puts our break-even just over $40 but not if we sell 10 more 2022 $45 puts for $13.80 ($13,900) - then we're down to net $39,695 and now, at $45, we make more than $25,000 and $25,000 more for each $5 over that we move.

    That was 2 weeks ago and now those July $42.50 calls are $3 but I feel better having the protection and the Oct $45s are $3 so that's our roll if we have to and the 2022 $55s are $3 so not a problem if we have to roll our 1/2 cover into a $25 spread as it was a $15 spread before the adjustments with the same $55 target.

    As far as I can tell, you did something similar but didn't roll the $35s down as far but otherwise you are in a similar position and WBA is up 2% today so why do you want to change the plan so quickly?

    As long as you are well-hedged, these are the kinds of prudent risks you should be taking to improve your portfolio.  I mentioned at the time that we were investing $39,695 to make $25,000 more for each $5 over $40 that WBA improves up to $55 and then "just" $12,500 per $5 over that.  Unless our premise changed in the past two weeks – that's the play.

  5. So now 3,000 (the 200 dma) didn't hold for 2 entire sessions so we need to start the clock again (just pushed back over).

    Remember what I said last week:  If we throw out the spike below the Must Hold line then we have a 20% market correction from the top and the 5% line is the weak bounce and 3,150 is the strong bounce line.  So far, it's taken 2 moths to make a weak bounce – that's not a V-shaped recovery at all.

    And is Capitalism so psychotic that the guy on CNBC (Stan Erck from Norvask) is right in saying that "since no company is big enough to make enough vaccine for everyone, there will be multiple vaccines released to the public."   That doesn't seem very logical – shouldn't SCIENTISTS decide which vaccine is most effective and then we GIVE the formula for the best one to all the Pharma companies so they can all use their equipment to make the best vaccine for everyone?

    Are we really going to let profits stand in the way of public health?

    I don't think 3,000 is going to hold on /ES and it's such a good short line I'll play that again and we're lined up with 9,300 on /NQ, 25,200 on /YM and 1,410 on /RTY so Nas and Dow are good lines for fresh horses as well and TIGHT STOPS ABOVE!

  6. Phil / WBA – thanks…  i don't know why i looked at the trade and assumed you would cover this one.  I had a lower spread to start with so my roll down to 35 was sort of equivalent to what you had along with the put.  On this one i distill have 48 to 50 target down from 55 earlier.  so i understand.   Short covers to generate some cash, protect gains,and exit out at the 50 to 55 price…

    • Department stores are higher in early trading as more locations report higher traffic than anticipated and a strong conversion rate from motivated shoppers.
    • Macy's (M +10.1%), Nordstrom (JWN +8.6%), Kohl's (KSS +7.2%) and Dillard's (DDS +6.2%) are all showing solid gains.
    • Also of note, Macy's pulled out a financial move yesterday by using its real estate to sell new bonds.

    It's like – "Yeah, we've got a great crowd at the beach!"  What could possibly go wrong?

    Recalling the summer of 'Jaws' -

    Notice the extrapolation – people haven't been able to shop (or leave their homes) for 2 months and the malls have a good weekend and that means things are going to be great moving forward?  You know I like Macy's – this is what we expected to happen but we're not going to lose our perspective over it, are we?

    • Stocks start mostly higher but have slipped from opening gains, as hopeful enthusiasm for the reopening of the U.S. economy and finding a vaccine for COVID-19 outweigh rising tensions between the U.S. and China; Dow +1.1% and S&P 500 +0.4%, but Nasdaq -0.7%.
    • "For the first time in this crisis, we are being bombarded by good news… and more new vaccine drugs look promising," Jim Paulsen, chief investment strategist at the Leuthold Group, told CNBC.
    • European bourses march higher after the European Commission unveiled a stimulus package that could be worth as much as €750B, with France's CAC +2.2%, Germany's DAX +1.7% and U.K.'s FTSE +1.4%; in Asia, Japan's Nikkei +0.7% but China's Shanghai Composite -0.3%.
    • In the U.S., early leaders again include stocks most punished by the coronavirus – such as Carnival (+9.1%) and United Airlines (+7.8%) – as investors anticipate an uptick in spending on non-essential goods and services.
    • Among the S&P sectors, financials are extending their recent strength while tech and healthcare are among the early laggards.
    • U.S. Treasury yields edge lower, with the 10-year yield down 2 bps at 0.68%.
    • U.S. crude oil -2% to $33.66/bbl.
    • It's launch day for HBO Max (T +3.1%), AT&T's high-stakes entry into the streaming wars built off the prestige TV brand it acquired in the Time Warner acquisition.
    • The new service joins a pitched battle with well established and new combatants, including Netflix (NFLX -2.1%), Disney Plus and Hulu (DIS +0.7%), Amazon Prime Video (AMZN -2.4%), and soon-to-launch Peacock (CMCSA +1.3%).
    • It's treading a now-well-worn streaming path in content, featuring the offerings of HBO, plus films and shows in WarnerMedia's library, and some original content.
    • Denying some Netflix-crushing rhetoric reported previously, incoming AT&T CEO John Stankey echoes many in the industry who say there's a lot of room in the growing streaming pie. "Our goal frankly is not to be Netflix," he says. "Our goal is to be something different … HBO Max is going to have a unique focus, and a unique position with the customer, and we're gonna play our game."
    • While it has a somewhat captive audience amid the COVID-19 pandemic, it must tap consumer wallets in a recession – and it's priced at $14.99/month, the same as Warner's existing HBO Now streaming service (though it offers a superset of that content).
    • The NYT notes that one in five HBO Now subscribers will be canceling in the next few months due to that cost, according to a Kantar study. Comparable planned-cancellation rates for rivals in that same study: Netflix, 7.4% (it's priced at least $9/month); Disney Plus, 8.6% (about $7/month); Amazon Prime Video, 1.2% (Prime costs about $9/month).
    • Meanwhile, in contrast to recent high-profile streaming launches, HBO Max failed to reach distribution deals with Roku (ROKU -2.5%) and Amazon Fire TV – and moved forward to launch without them.
    • "We must be doing something right if somebody believes we are now starting to be more in conflict with their business, so I don't necessarily take that as a bad sign," Stankey says.
    • The Mortgage Banker's Association this morning reported a 9% rise in its Purchase Index for the week ended May 22. Coupled with previous gains, that means applications for new purchases have risen to pre-pandemic levels.
    • And don't forget yesterday's new home sales data. It was April numbers, so old news, but at 623K was a relatively healthy pace and way higher than expectations for just 490K.
    • Interested names: ReMax (RMAX +3.0%), Realogy (RLGY +5.8%), Redfin (RDFN +1.8%), Zillow (ZG -0.1%), Toll Brothers (TOL +5.5%), Lennar (LEN +3.7%)
    • Facebook's (FB -1.6%) new Shops feature may be generating $7B in incremental profit by 2023, Citi says.
    • Analyst Jason Bazinet assumes that Facebook can capture about 2% of global e-commerce revenue by 2023 and applies Amazon's ad revenue metric – 4% of gross merchandise value – then includes a 5% fee on retail sales conducted through Facebook Shops.
    • He maintained his Buy rating and raised his price target to $275 from $245, implying 20% upside.
    • Street analysts are Bullish on Facebook, as are Seeking Alpha authors. It has a Quant Rating of Neutral.

    Zuckerberg now 3rd richest person in US at $80Bn, passed Buffett after his airline mistake cost him $10Bn.  

    Bezos at $147Bn AFTER the divorce!

    Gates still at $106Bn despite giving more than half away (and despite Steve Ballmer):

    Between March 18 and May 19, the total net worth of the 600-plus U.S. billionaires rose from $2.948 trillion to $3.382 trillion, a report found 

    Look – I found our bailout money!  That's $400 BILLION Dollars transferred to the Top 0.000001% – Go Capitalism!

    You're welcome Batman.  Long-term strategy is tricky but look how far you've come on everything else!  We used to have to fix the whole trade – now it's just planning details…

  7. Trump launches new round of complaints Obama ‘spied’ on his campaign

  8. So much for that leg down, bouncy now.

    • Lockheed Martin (LMT +4.2%) CEO Marillyn Hewson is presenting at Bernstein's 36th Annual Strategic Decisions Conference.
    • She says company factories stayed open through the entire coronavirus crisis and the supply chain is being monitored daily for COVID-19 impacts.
    • While Lockheed will deliver 18-24 fewer F-35s this year, the defense giant sees a return to pre-COVID F-35 production levels by end of the year and is optimistic about bipartisan support for the FY21 defense budget.
    • Boeing (BA -0.0%) confirms it will begin laying off more than 6,000 employees this week.
    • "Following the reduction-in-force announcement we made last month, we have concluded our voluntary layoff program," CEO Dave Calhoun says in a note to employees. "Now we have come to the unfortunate moment of having to start involuntary layoffs. We're notifying the first 6,770 of our U.S. team members this week that they will be affected."
    • Boeing's international locations "also are working through workforce reductions," Calhoun says.
    • Goldman Sachs (GS +3.5%) Chief Operating Officer John Waldron says the bank is still on track to hit medium and long term growth targets even as it navigates through the pandemic.
    • Still, Waldron says Goldman will slow down hiring plans for the private wealth management division due to the economic slowdown and delay the launch of a digital wealth management product until 2021.
    • Walt Disney World (DIS +0.3%) is requesting a phased reopening in Orlando, Fla., with the Magic Kingdom and Animal Kingdom restarting July 11, it's telling an Orange County task force (ongoing).
    • Disney's Jim MacPhee says EPCOT and Hollywood Studios would follow with their own reopening on July 15.
    • The openings will come with enhanced protective measures, including face coverings, hand washing/sanitizing stations and "physical barriers where appropriate," MacPhee says. There will be enhanced cleaning and temperature screenings for guests and cast, as well as reducing guest and cast member contact points.
    • At the same meeting, SeaWorld (SEAS +2.2%) has requested a June 11 opening.
    • May Uncertainty Index284.4 vs. 223.4 prior (revised).
    • Expectations Index: 25.0 vs. 47.4 prior (revised).

    • The reopening of the economy appears to be going at a faster pace than most had imagined even a few days ago, with even Los Angeles joining in over the past few hours.
    • That's led to a big change in leadership of this market rally – now it's banks, specialty retail, industrials, and energy outperforming. Lagging are favored stay-at-home plays like Zoom Video (ZM -8.1%), Peloton (PTON -6.3%), Facebook (FB -4.7%), Amazon (AMZN -3.6%), Walmart (WMT -1.6%), Costco (COST -1.7%), Nvidia (NVDA -7.4%), Citrix (CTXS -1.8%), and PayPal (PYPL -4.4%), to name a few.
    • The big-cap tech lean for stay-at-home is pressuring the Nasdaq (NASDAQ:NDAQ), which is down nearly 2% while the S&P and DJIA hang close to flat.
    • It was just two weeks ago that Los Angeles Public Health Director Barbara Ferrer helped spur a modest selloff in stocks by suggesting another three months of lockdown unless there was a "dramatic change."
    • Apparently there has been a "change," because Los Angeles is now on the fast reopen track. Mayor Eric Garcetti last night said retail businesses today can begin to allow in-person shopping, and even houses of worship can resume business.
    • County Supervisor Janice Hahn says LA will request that Governor Gavin Newsom give the green light for the next stage, which would allow places like restaurants (dine-in) and salons to reopen.

    No particular thing moving the markets.  

  9. Phil / LOL – coming far.     I have a long way to go……  but thanks.

  10. Might be a good day to buy back the July 65 IRBT calls

  11. uh, timezone brainfart, that would be 4hr15min to launch!

  12. IRBT/Jeff – Same thing, we'll just roll them along and they are protection for now.  IRBT as overpriced as anything else at the moment.

    Launch/BDC – This is going to be cool.

  13. Phil// Question about Work From Home – As companies have been slowly and steadily letting more and more people WFH won't that put pressure on commercial real estate and to the REITs like NLY, ARR, etc?


  14. Phil/ARR

    what do you think of current price?


  15. rookie & pat_swap

    VNO  Vornado is a REIT that has lots of NYC office space and ground floor retail that could be at risk on a longer term basis .  

  16. Homework/Rookie – I agree it may hurt the whole industry but not quickly as people have multi-year leases but it's a trend we have to stay well ahead of.

    ARR//Pat – See above.  I'm worried about the health of the sector and ARR was a frustrating hold at the best of times in our prior portfolios though $8.50 is a very good price.  I think it will be rough for them for a year or two and, if they cut the dividend, they may get dumped deeper than this.  Next dividend is 6/12 so I'd see what they say around that.

  17. Thanks for the webinar, Phil.  :)

  18. ramp ramp ramp

    did they create the vaccine or something?? 

    buy anything? buy everything?

  19. Phil/ES – Do you still have the short open?

  20. Well someone wants the market higher – what a surge into the close.

    That's why it's good to have longs and shorts – at least some of stuff is making money all the time.

    /ES/Ravi – Of course not!  When we have a short (or long) we set a stop once we have a profit and the 2nd set gave us a nice run from 3,000 to 2,965 so 2,975 was the stop at that point.  There's no hard and fast rule but, at $50/point on /ES, 25 points was $1,250/contract and 35 was $1,750/contract so how much profit has to slip through your fingers before you take it off the table.  Had we not already had a nice win in the morning from 3,030 to 3,000 ($1,500) – I would have had much tighter stops on the 2nd set.

    Now we're back over 3,030 but you can't bet against a run like this – you have to let it play out.

  21. SPACE Launch aborted due to weather.

    • The NASA-SpaceX (SPACE) launch to the International Space Station was scrubbed due to weather.
    • NASA astronauts Bob Behnken and Doug Hurley were less than 20 minutes away from launching on the Crew Dragon capsule atop the Falcon 9 rocket before the weather cancellation.
    • The flight will now be scheduled for sometime on May 30 or May 31.
    • The Dow racked up its second straight 500-point gain, surging 2.2% to close above 25,000 for the first time since March.
    • The S&P 500 traded 1.5% higher to close above its 200-day moving average and over the 3,000 level for the first time since March, while the Nasdaq Composite added 0.7%.
    • Rising U.S.-China tensions that weighed markets last week were shrugged off, even as Secretary of State Pompeo said the U.S. certified that Hong Kong is no longer politically autonomous from China, a move that could have far-reaching geopolitical consequences.
    • Bank stocks powered higher, with JPMorgan Chase jumping 5.8% and Citigroup soaring 8.5%, while investors rotated out of stay-at-home stocks such as Zoom Video, Shopify and Teladoc Health.
    • Micron Technology (+7.9%) posted a rosy outlook for its Q3, which gave the tech sector a late boost while still lagging the broader market.
    • U.S. Treasury yields mostly edged lower, with the benchmark 10-year yield settling 2 bps lower to 0.68%.
    • U.S. WTI crude oil closed down 4.5% to $32.81/bbl.
    • It is "really hard to fight the tape," Galaxy Digital CEO Michael Novogratz said of equity markets now, highlighting that he was putting on puts and put spreads, and has almost thrown in the towel with that strategy and his views on the market direction short term.
    • The market "feels like" it wants to go up, he said in an interview on CNBC, but notes that it is not a market you buy and come back twelve months later.
    • He is seeing rotation into stocks that lagged the market, and so there may be another leg up, but ultimately the supply dynamics and economy itself mean that stocks are getting "very expensive" as the economy is unlikely to come back the same way it was.
    • It is not a great sign for market bulls, he said in response to the observation that Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) were at one point in the red today and how they aren't rallying on days when banks and other cyclicals rally. He noted it looks like there's rotation just one way or the other.
    • His other frustration on the market was on supply dynamics, with buybacks down 80% this year, and M&A "pretty much dead" — when the market runs out of enthusiasm, it could have a ways to fall, he added.
    • On Bitcoin (BTC-USD) and in response to Goldman's recent criticism of the cryptocurrency, he rhetorically asked when anything becomes a store of value, pointing out heavy hitters like Paul Tudor Jones and 100 million others that own the currency. "Does Alan Greenspan" need to endorse it?
    • "I think" we're "way past" the point of whether the currency has credibility, he said.
    • "It's a matter of time" of when we see more and more adoption. We've already crossed the "rubicon" Novogratz concluded.
    • Novogratz has been a vocal proponent of the currency for some time and runs a crypto investment firm.

    • The retail sector is outperforming the broad market today with apparel and mall names helping with the cause. Notable gainers include Designer Brands (DBI +15.9%), Genesco (GCO +12.5%), Gap (GPS +14.1%), Guess (GES +12.0%), Tilly's (TLYS +10.4%), Boot Barn (BOOT +12.3%), American Eagle Outfitters (AEO +6.9%), Citi Trends (CTRN +5.9%), Zumiez (ZUMZ +7.5%) and Children's Place (PLCE +7.1%).
    • The early word from malls that have opened back up in the U.S. is that foot traffic and conversions are higher, while the time spent shopping is down as anticipated.
    • MGM Resorts (MGM +0.8%) says it will reopen its Bellagio, New York-New York, MGM Grand Las Vegas and The Signature properties in Las Vegas on June 4 following the approval of the Nevada governor and gaming authorities.
    • MGM says amenities at all properties will be limited at the beginning. As demand for the destination builds, additional venues within the resorts will open and other MGM Resorts properties on the Strip will also reopen.
    • Source: Press Release
    • Wynn Resorts (WYNN +1.8%) trades higher after confirming that its Wynn Las Vegas property will reopen June 4 as approved by Governor Steve Sisolak and the Nevada Gaming Control Board.
    • The company plans to open both hotel towers and the casino as well as all restaurants. Wynn is utilizing a new health and safety plan to protect guests and employees.
    • Source: Press Release

    • Crude oil futures (CL1:COM) are in retreat, pressured by reports that Russia wants to begin easing planned OPEC+ production cuts in July; July WTI -3.3% to $33.23/bbl, July Brent -3.1% to $35.05/bbl.
    • "Some in the group are likely to voice support for extending cuts beyond July, particularly if the market remains clearly oversupplied amid lackluster summer driving demand," says Schneider Electric's Robbie Fraser. "Russia's comments would suggest such an extension is unlikely for now, but ultimately even the group's most skeptical members may change their stance depending on price evolution and market fundamentals."
    • Traders also are concerned that expected recovery in energy demand could be delayed if U.S.-China tensions grow, and "the threat of a fresh U.S.-China trade war is no longer just a tail risk," says Stephen Brennock of oil broker PVM.
    • Meanwhile, Morgan Stanley raises its year-end Brent price forecast to $40/bbl, citing a faster than expected balance in global oil demand and supply as countries ease coronavirus restrictions and major producers cut supply.
    • AMC's (NYSE:AMC) stepwise rebound from its pandemic-era depths continues, up 4.7% today as MKM Partners upgrades to Neutral, from Sell.
    • Since closing at $2.08 April 13, shares have risen 157%; they're still down 59.7% over the past 12 months.
    • MKM's Eric Handler removed his bearish call noting the short-term risk of bankruptcy has "lessened considerably." He notes theaters seem to be setting up for a July/august reopening, and that a new trailer for high-profile Warner Bros. release Tenet shows enough comfort with plans for marketing dollars to start flowing.
    • Handler says AMC's problems are far from over but now believes there's enough cash to get through the end of the year.
    • Seeking Alpha authors are Neutral on the stock, while its Quant Rating is still Very Bearish.