April 2009


Pretty quiet out there in market analysis land. Everyone must just figure there’s no point in analyzing anything any more, since everyone has now bought every share of everything at a very just price. The only recap I found was Market Talk by John Shipman (summary, no charts).

And this interesting options play, via Crimson Mind: Someone thinks $XLI is gonna get nailed this spring…

In the May contract, over 71,000 puts have traded at the 19.0 strike. XLI (SPDR FD INDUSTRIAL) is at 21.78 +0.80

…while someone (else?) thinks it’s gonna have a good summer.

Call volume is running 2.5X the 10 day average. Total of 3308 puts and 29379 calls have traded. A large amount of June calls were traded at the 23.0 strike. (note high OI)

So how about some news you can’t use? It’s hard to find any links or websites to read on the internet. I feel ya.

Google would appear to be bleeding sales talent.

Also, a couple great bear recovery comparisons.

Also, if you believe as I do that CRE is gonna tank sometime in the next 88 weeks, Bill Luby has some more nuanced ETF plays than SRS/short IYR for ya.

Also, go read Chris Nelder on the offshore drilling conun”drum” (ha!). If anything should be rallying hard because we’re on the verge of recovery, it’s oil, because we don’t have any.

Also, if you haven’t read Chris Whalen’s stunning and exhaustive piece on AIG, reinsurance and CDS swaps, and side-letter fraud from earlier this month, you’re missing out. A juicy tidbit:

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

Good night and good luck.

UPDATE: Jack McHugh is out, and does not disappoint. Man, someday I’ll link like that. Someday…

Also, buh-bye Chrysler. Hopefully in Chapter 12 you “function” as a “business”.

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My main technical objection to this rally (for fundamental objections, see pretty much the whole blog) since its second or third week has been its refusal to back and fill. The flat days and pullbacks have been few and far between, and the couple of strong selloff days since March have been followed up by furious buying. The markets have been irrational for a long while now, and anyone who will tell you that they’re panicking up any more rationally than they’ve been panicking down is a fool. The danger is that while investing consumers–who after all are supposed to benefit from the wisdom of institutional traders, which is why they pay their salaries and ridiculous bonuses–get hurt when the market drops, they risk to get hurt a lot more if they mistake a sucker’s rally for the real thing. I believe that companies doing, say, outsized program trading might be goosing this thing along to take advantage of precisely such suckerness. I’d rather people’s existing holdings get hurt further than that they get deluded into holding more at this point in our “recovery”. Full disclosure: I care more about real people getting screwed by trader activity than about traders’ bottom lines. (Even yours!)

But I digress. Whether the tape lies or not, whether endless upness without building real support is characteristic of bear market rallies or not, blah blah blah, for anything other than a short- to intermediate-term trade I’m looking for stubborn independence in a stock’s movement, and in the underlying company’s business. I’m looking for the non-nonsense. It’s an obvious fact that some companies really have bottomed, regardless of what you expect the market to do. It’s anyone’s guess which companies those are, and I’m not in the habit of making those calls, but I like a safe bet, if only as a nice idle thought in the midst of so much meaningless volatility. Don’t get me wrong, I’m not really a fundamentals guy, or at least not with any more weight than I give sentiment, and the chart still rules. But in the case of Powerwave, all three look pretty strong to me.

Powerwave is a telecom sector play. They operate worldwide, making all sorts of infrastructure components for PCS, 3G, and 4G networks, a reliable growth field (not that I need to point that out), especially as several U.S. carriers have committed to 4G. Their customer base is OEM manufacturers and wireless network operators. They’ve had three tough years as infrastructure demand has been all over the place, but as their 10-K from March 2009 details, they’ve taken the cue, began restructuring in 2006, and in particular spent the last half of 2008 getting leaner and meaner. They are expected to take further losses from that reorganization this quarter, but an average of analyst estimates (I don’t give a shit, but you might) show them with positive earnings on 2009, doubling in 2010.

I like this as a smartphone play, a stimulus/infrastructure play, and a tech-edge/trend play. In short, there are lots of reasons to like this, which is what I look for before classifying something as a long-term trade (>2 months to target) or (yikes!) an “investment”.

PWAV daily

As for the charts (it’s huge, click to see), to me they look great. Sure, the same v-shaped recovery we’ve seen in the rest of the nonsense rally, but that has given way to almost a full month of sideways action, with one nice push up on 3x volume a week ago, and prices holding steady since, despite some very turbulent broader market action. As a small cap (132M shares) they’re not expected to tightly correlate to the markets, and while as I said I’m not in the call-making business I expect them to hold up well in what I am still fairly sure will be the coming weeks’ pullback/retest of lows. Note that earnings as reported by their sector ($AAPL, $RIMM, $NOK, $T, $VZ) are looking pretty darn rosy, all things considered. People with money to spend are hooked on the smartphone “lifestyle”. They are going to huff 4G like glue.

Over at CAPS you can pick up a nice summary of current sentiment and all sorts of stats and history on the company. Also available Yahoo (blech), MarketWatch (meh), and Google (yay!) style. Note that the CAPS user recommendations are quite outdated, but current analyst projections at MarketWatch look up to date. Plenty of news and PR links available at the three portal sites.

Near-term price resistance at $0.90, if you’re waiting for the next breakout. And they report earnings Monday, May 4 if you prefer to wait for the news. Should they “fail to meet expectations”, I’ll be taking that as a buying opportunity. And should they beat, I’ll be taking it much the same way.

Disclosure/Conclusion: Pretty damn long $PWAV. Lookin’ to get longer.

Two days of essentially zero trading here. Watching the charts pretty carefully, however, especially the S&P via $SPY, which I would call the best current tell for strength and weakness, despite small caps leading rally performance and the NASDAQ  (I watch it via $QQQQ, a.k.a. “the Qs” if you’re in training) having the best performance YTD.  Between the swine flu freakout and last night’s stress test “leak” (which inspired a pre-market drop and then a steep buying frenzy), I’m beginning to wonder whether my whole look-for-the-news-tide shift will even happen here. The market has had two strong mornings followed by two weak afternoons, and news good or bad doesn’t seem to matter one bit. Prices might just have to keep weakening before news starts to look bad.

Without further ado, the analyses:

  • Tickerville’s tape talk is up for the day. He’s watching $SPY closely too. Spoiler: he’s still pretty bullish, though doing “a lot of hand-sitting”. ~17 minutes.
  • Trader Mike, I heart you
  • Jack McHugh gets his commentary in a little early tonight, always a must-read with the news links you need right thar at the bottom all handy, that this time makes the round-up.
  • Also, a new analysis candidate, chartless and concise (which characteristic always makes Mr. U go “Nice!” in his Borat voice) from the newish Market Talk blog.

Couple other things I think are worth a look, but caveato lectorio: these are newsish, not honest tape. In the when-will-they-learn category:

Goldman Sachs Boosts Risk-Taking at Fastest Pace on Wall Street

Wall Street Pay Bounces Back

And in the oh-no-what-do-I-do-with-this category:

The Next Great Bubble? (China–great analysis)

The Fed: Our Next Troubled Bank? (Now with new & improved 48-1 leverage! also via Ritholtz)

Be careful out there.

My need for analysis is pretty low right now, as I pull back bigtime from my big mistakes and seek a return to mostly (alas, less) cash until I get my head screwed back on straight and feel ready to execute as I was back before this whole rally got going.

My source list is going to change in this time, too. I relied on Brian Shannon for several months, but he’s now gone premium, so I’m looking for new grist. Kirk took me to Dave Landry, who has a nice long & easygoing style if you’ve got an hour or so to watch and you’re more interested in swing/position trading like Mr. U. Lots of good teaching, esp. for beginning traders, in this week’s analysis. (If you just want his analysis of index, sector, and a few individual names, it starts about 40 minutes in.)

Elsewhere, Tickerville has (mercifully for all parties concerned) sped up his video feed, and has a typically fine 22-minute cross-sector look up as well. The very impressive Phil has just weighed in with a thorough recap, too. Nothing so far from Trader Mike, still my current fave for brevity, clarity, and just plain common sense (a Mr. U weakness).

What do you watch or read, fictitious reader, for free analsysis? Feel free to fictitiously comment here.

UPDATE: How could I forget good ol’ Random Roger, with his fabulous (and much more conceptual and investor-focused) weekly big picture? About 8.5 minutes, no charts.

Having sold several unborn grandchildren into slavery to pay off a few of this week”s failed shorts, I am further obliged to eat this blog’s words on last week’s tidal-shift-in-the-news-reaction call. (As someone who subscribes to such arcane notions as “truth” and “fact”, I feel it is important to distinguish “right” from “wrong”. Nutty!) Not only am I wrong; if the rally presses on–and it certainly looked on Thursday and Friday like it wanted to–I stand to lose more money. The height of trading disgrace! Damn you, Mr. Unexpectedly, when are you going to learn to take small losses?

While losing money (and grandchildren) can make a guy pouty and petulant, I hope I don’t sound like too much of a sore loser if I say that trader wisdom as a justification of this increasingly irrational optimism we call a rally (or, indeed, any wise saw used to make any trending market movement seem like incontrovertible fact) makes me wanna bite people and throw things at the same time. (Rest assured, fictitious reader, before too long you will hear me winning and complaining, too. Such is one’s fate when one is a small-town tycoon/crank played by Lionel Barrymore.)

The nugget

But I digress; back to today’s target bit o’ wisdom. My great trading error of late, if you’ll pardon my frangolese, is understanding just how royally the global economy is still fucked, and refusing to accept the market’s rejection of said fuckédness. Instead, said wisdom chirps, I should just “trust the tape,” because “the tape never lies.”

Rot and poppycock!

While anyone is entitled to a little linguistic imprecision on the best of days, this bromide is particularly ill-constructed. Its faux-zen chin-stroking tone is especially grating–it smacks of Hollywood bonsai-trimming sessions with Mr. Miyagi more than anything any ancient philosopher would have wasted time pondering. Its use is misleading, inaccurate, and casuistic, cited as proof of free-market capitalism’s irrefutable honesty, but only by people who already believe the free market is honest. It holds about as much truth as a brand name for a pharmaceutical product or a complex derivative.  Let’s dismantle it together, shall we?

2009: Year of the Truth

If the tape never lies, obviously, it always tells the truth. Interesting–let’s take a quick look at 2009’s tape via the indices. What does it “say” about its underlying components, i.e. the value of major American capitalized industry? Until early February, it says, things were mildly weak or slightly improving. Then, suddenly, things got very, very bad. (Tuesday, February 10, 11 a.m.: Geithner spoke. Apocalypse!) Then, just as suddenly, everything got really, really great again!

Yeah. All “true”. Perhaps it’s just a problem of time frame then? Or maybe it’s because I’m looking at indices? Certainly, if we look at an observable event, something you can isolate in time, we can watch the tape spew some oracular genius. OK! Let’s’ look at Capital One Financial this past week. A major event should provide something measurable: on Wednesday after the close, $COF announced earnings. A horrible quarter, results that indicate both the state of the economy and the state of the business. After a strong after-hours drop, the all-knowing tape spent the next two days adding 25% to its common share value, for a 15.4% gain on the week. Capital One Financial is in a bad way, and likely to worsen, which adds up to every one of its dollars now being worth a buck fi’teen? Um, obviously, no. I could see that being the case for, say, the results of $AAPL earnings, their best Q2 ever in a miserable economy. Now that is a strong company, in fact. Aaand the guru tape says… yeah, ok, here’s 1% for your banner week.

He-tape said, she-tape said

Poppycock, say you? I could go on launching anecdotal torpedoes; you could remonstrate, reading it differently; there are a zillion factors I’m not mentioning; we could argue for days. This back-and-forth, when translated from words to buys and sells, is the tape. The tape doesn’t “say” anything at all. It’s just a record of what quants, prop desks, and traders of all stripes think tick by tick, and it doesn’t take a genius to see that no matter what your time frame, it is a record of conflicting opinion as often as it is of consensus. It’s the inverse of that other (equally annoying) cliche about stopped clocks: If the tape reliably “tells the truth” in any one moment, then logically speaking it’s lying the next time it moves. And its honesty is immaterial; no one gives up and goes home if we hit the value on the head, because trading is speculating, and doesn’t give a quarter of a damn about the truth. If the tape pronounced a security’s price incontrovertibly, froze a company’s value in the glare of absolute knowledge, there would be no more buying or selling, because the discovery would have ended, until the company evolved and its value changed. Traders would just walk away–no more action. No edge.

The point here is not to crank out weak semantic wit. It’s to get to the heart of the matter: what we talk about when we talk about tape not lying. Price movement is an expression of conviction, or rather the net of a bunch of conflicting convictions, about value and its likely reflection. I buy $COF at 15 because I believe (whatever the source, it’s just a belief, not a “fact” or a “truth”) it is worth more, or at least other people are likely to think so soon; you sell it short because you believe it is worth less. From the moment we place our bets, the tape appears to reveal the truth like a called poker player turning over cards, making one of us right and one of us wrong, and thereafter, indisputably, one of us is a tape-fighter and the other a genius.

All brought to you courtesy of the booster-rocket refraction of hindsight. When a stock jumps 25% in 13 hours of trading, it may look like the tape was sitting on a mighty strong truth, but it’s really just a sudden consensus feeding on itself, the movement causing more and more $COF traders to reach the same conclusion: Whether short or long, they both needed another share. The ordinary cacophony of opinions suddenly resolves itself into a clear picture of fear (here, the shorts) and its common-law spouse greed (the longs), and tape “truth” is “born”.

The flop

The poker-player comparison is useful for another reason: even if the tape did speak, it couldn’t possibly tell the truth about value, because value doesn’t exist, except as constantly shifting assumptions. I used to think that poker was a lot riskier than trading, because there are so many unknowns, and chance is certainly in play. But at least at the end of a hand, there is order: Cards are turned over, an uncontested winner and loser discovered. The only possible truth for a publicly traded company, as Zero Hedge‘s fabulous tagline reminds us, is bankruptcy and liquidation, the clock stopping for good. Though the tape may anticipate a market death, and will certainly have a lot to “say” about it however late to the party, the one incontestable statement of value takes place in court, not in the market.

So when the twitter stream pops out the old warhorse, I may remonstrate, but the more productive thing to do is to translate its meaningless message into plain old common sense:

Chaos and conviction, fear and greed, have nothing to do with the truth, but everything to do with often-repeated patterns of human behavior.

(Not as zippy, is it? Kinda like, say, actual trading itself–more karate, less kid.)

Struggle against these patterns–order the chaos, fight the consensus, get greedy amidst the fear or fearful amidst the greed–at your account balance’s peril.

To which I have but one more thing to add: we trust this rally tape at our economy’s peril.

Today’s outlier earnings reactions aside ($COF anyone?), I’d say that the failure over the last two days to push higher in the indices is another confirmation of the news tide shifting and the March rally’s petering out. Today looked like pitched battle in the charts, and also over on Stocktwits, where I kept the open stream up for much of the day (a habit I’ve been quitting as signal drops and noise rises), trying to measure a little trader sentiment. The number of times I saw back-to-back tweets of absolute conviction that it was time to buy the financials or time to sell them was a whipsaw of its own.

Earnings news is all over the map, of course, and the market’s volatile intraday moves are confirming this: analyst expectations plus beats and misses plus guidance plus one-time items and two-timing accounting plus recent price and volume action is a lot of vectors, and as the big players report and players large and small react, we get a choppy trader’s market, and the bulls and the bears get louder without being any more correct. Today’s 3:30 selloff was as hot and heavy as yesterday’s buy into the close.

Chris Nelder has a nice post up today in honor of earth day. He’s encouraged by all the new renewable energy projects underway here in the U.S. (as am I), but his focus then turns to the rally and the lockstep chart patterns of different sectors.  His reminder that financials are the real drivers of market action is timely too, and the real tell that this fat rally is not the rally. The financial sector is leading America and the world out of economic torpor? Uh, no. But day after day, it leads the market up, down, and all around.

Infrastructure and real estate would be important tells in a new bull market, of course, but the leading indicator of real building strength would be–or rather, will be, at some unspecified future date–technology. Innovation in tech is, hands down, America’s greatest manufacturing capacity these days. While tech stocks have of course been strong the last few weeks too (what hasn’t?), on any given day they continue to spank or tank with the banks, as if the two industries shared the same valuation. Total nonsense.

Were this a real bull market start, tech would stay strong in a selloff like we saw late this afternoon, and not just relatively strong. STRONG, like the industry actually is, even in recession. Sure, businesses and consumers are cutting back, but IT is buried deep in every business infrastructure and many lives now, with the internetz cranking away and kiddies young and old hitting the video-game crackpipe and smartphone telecom morphing from the new cool to the next must-have. That is demonstrable, logical strength–trend–that should shrug off confused price discovery if salad days were ahead.

The current profitability of Google or Apple or Research in Motion, considering the breadth of this recession, is very impressive (never mind Wall Street’s senseless expectations of endless growth and eternal youth), but these stocks have rallied off 2009 lows a lot less in percentage terms than, say, Citigroup, and remain well off their 52-week highs. If the bull market were back, the opposite would be true: tech would be so strong that crummy broken financial companies barely necessary to their doing business (no debt, huge cash) were dragged along for the ride.

Put simply, financials are the wrong leading index, but they’re our leading index at the moment. While they have surged off severely distressed lows and pushed the markets up, the state of finance here and abroad continues to make sustainable market growth impossible. The bulls may not want to see this (that’s a Hussman link, a must-read), but a few months’ earnings as tweaked by a press release notwithstanding, we remain one or two nasty news stories away from this fraudulent, grabby, and broken sector’s dragging our undervalued technological prowess–and the rest of the market–down all over again.

Have hardly traded the last few days. Annoyed by the continued rally, I recognized my annoyance for what it was: noise and distraction from reading and reacting efficiently. So apart from hedging a couple of ailing shorts, I raised the bar to open any new position: it had to be in the charts and the facts. Little room for anything but chasing there.

In the meantime, the shift in the tide of news I wrote about last week has more or less met my expectations. Earnings reports, analyst predictions, and reactions to their collision are excellent barometers; they are more manipulative than the most biased news, and as such are almost reaction gauges. Note the difference between the all-out ecstasy that greeted Wells Fargo’s “pre-report” April 9, vs. tepid-to-crushing reaction to Citigroup and Bank of America Friday and today. The climate of news reception is changing, and I still think the Goldman story wraps it all up in one pretty pivoting package. (And that story isn’t over, either.)

Today’s preoccupation as the tide turns is this: however influential, to some extent news is just “noise”, which can be a distraction from trading. Like “trust the tape” and “only price pays”, shutting out the noise is a maxim, and the brightest traders out there repeat it like a mantra.

I’m not too bright a trader yet, but I don’t suck at thinking, and part of the problem with the shut-out-the-noise trope as I see it is that we’re in fairly uncharted waters with current market movements. I see no need to fling stats at you, but erasing 12 years of index gains or rallying harder and faster than the markets have since 1933 is not exactly everyday market movement. To sit and study the charts and say they’re giving you the same real-time advantage, the same superior clarity over noise, following the same rules, as they would in a “normal” year, even a run-of-the-mill cyclical-bear kinda year, just seems illogical to me, unless you’re pure technical and/or day-trading only.

Don’t get me wrong, any trade must pass a chart test unless you’re just a blind gambler or a fool (full disclosure: I’ve been both, at times, and am likely to recidivate), no matter what precedents are getting hosed. But if you’re at all interested in fundamentals or momentum, or even peripherally interested in gauging overall sentiment (particularly if you believe in contrarianism), you must confront noise from markets and media both, penetrate it to get the goods. How to do that is another subject for another buncha posts, but I maintain that sharp noise can be as good a friend as the trend.

This post coincides with the Stocktwits announcement of new premium blogs from two of the aforelinked top traders. While I think Stocktwits is a fantastic tool, especially when used wisely, and while I wish them the best in their value-added ventures, it is worth pointing out, however cynically, that this is a kind of noise creation. The paid premium is meant to insure its utility, its non-noiseness, but every corner of the web, paid or not (including this one), is noise until proven signal. Not to knock experts like alphatrends or upsidetrader; Mr. U has personally learned heaps from Brian Shannon’s daily analysis videos (until today, a crazy-good gift), and following upside’s stream is as close as you get to the trading genius muscle flexing before your very eyes. I was lucky enough to get on board for free–I found them on stocktwits, of course–and learned they were well above noise immediately.

I’m aiming at a larger issue. I am obsessed with the internet’s drive to become the next internet, which I believe will be as a real-time mirror and maker of offline life. (Not that hard to imagine, but lag is everything here, the slippage between time and space.) This blog exists to discuss particular manifestations of that drive, in particular the intersection between real-time internet, market movement, and changing trader/investor behavior in an investing crisis. I find market movement and trading pretty fascinating on a lot of levels, but its significance here is as a damn good model for watching the web molt and grow at its incredible pace.

So: the internet is a noise generation machine. It simply does not reverse, always pushing forward, accumulating, piling on. This relentlessness is both its principal real-time activity, and the primary obstacle to its real-time utility, because unlike a person’s regular ol’ life, the web has no limits, and no point of view. Perhaps more importantly–and unlike the markets, also performing forward-only (they sell “futures”, why not “pasts”?)–it has a very low cost basis: 99.999% of what’s out there, new or old, from crap to crux, is  available free, to anyone with a computer, a connection, and the time to tune in. The price of following a link is the price of thinking a thought, not taking an action, not buying or selling.

This is of course the main problem. How great would it be if every link was actively valuable? If only “the good websites” hit your radar? This is the value added by the best tools, and why companies like Google and Twitter–and, for that matter, individuals like upsidetrader and alphatrends–are such game-changers. But beyond the rather limp and outdated (though recently quite lucrative) strategy of advertising–itself a distraction from and obstacle to the process at hand–no one has figured out a way to harness that active potential as a revenue source.

Enter Stocktwits Premium: capitalize on trader’s desire to know right now, in exactly the same place you’re already getting all kinds of trading ideas great and small, instantaneously and for free. From what I’ve read, this is step one toward scaling in of a broader premium platform, but I have to say that at first glance it’s not nearly as innovative as Stocktwits itself, for two reasons. Number one, there are lots of options for traders looking to buy better traders’ ideas. They are fighting for the same dollar you might legitimately fork over to Kirk or Phil or Quint or dozens of others, presumably banking on stickiness to prevail. But number two–and all the other players are wrestling with this, too–it’s an old-media style strategy, the equivalent of a newspaper or magazine subscription, with only the real-time value add to set it apart: newspapers don’t make you richer day to day in any measurable way like good training and trade tips.

Again, the goal here isn’t to criticize the move, but to observe and meditate on its implications in the ever-changing noisescape. Plus, you can’t blame them–the model has to be old because, as Clay Shirky pointed out a month back, there isn’t a new model yet. Stocktwits is taking their best shot, selling noise reduction–I predict quite successfully, despite fresh weakness in similar attempts from, say, TheStreet.com–to their exploding user base. But whatever guiding hand Stocktwits might offer, for now, the burden of how exactly to pick through the virtual landfill of noise rests on the user’s shoulders, because the subscription model deliberately erects a wall between the haves and the have-nots, no second-guessing allowed. If you don’t subscribe, you don’t know what you’re missing; if you do, you trade the time (and money) you spend in that one space for missing out poring over other noisy corners, rummaging deeper in the real-time noisemaking experiment.

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