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In This Market Bear And Bull Calls Are Unstable, Flexibility Rewarded

Published 01/27/2015, 11:53 PM
Updated 07/09/2023, 06:31 AM

T2108 Status: 51.5%
T2107 Status: 46.5%
VIX Status: 17.2
General (Short-term) Trading Call: Bearish (only because S&P 500 is now below its 50DMA. Overall, market remains in a “chopfest” trading range and bear/bull calls are NOT stable)
Active T2108 periods: Day #68 over 20%, Day #27 above 30%, Day #7 over 40%, day #2 over 50% (over period), Day #37 under 60% (under period), Day #138 under 70%

Commentary

Having multiple components of the Dow Jones (DIA) report disappointing earnings was just too much for the market to handle. Sympathy selling helped send the S&P 500 (ARCA:SPY) below its 50DMA for the fourth time in just 6 weeks. The index lost 1.3% yesterday. The chart below shows a trading range that has lasted at least 3 months, creating an official chopfest. The 50DMA AND the line marking the start of last month’s “Santa Claus” rally are serving as pivots. This pattern makes bear/bull calls very unstable and rewards flexibility and mobility.

The S&P 500 is in a bearish position again but remains locked

The S&P 500 is in a bearish position again but remains locked in a trading range.

Yesterday's loss finished the reversal of all the S&P 500’s gains post ECB QE (European Central Bank quantitative easing). T1208 fared much better as it bounced of its lows and managed to lose a mere two percentage points. This is not quite a bullish divergence, but it did set up a potentially strong day as the market gets revved up for another Federal Reserve decision. I ALMOST put on another fade volatility trade in anticipation of more soothing words from the Fed, but the jump in volatility was not nearly extreme enough to setup a good risk/reward trade.

VIX: Volatility gaps up on a bad earnings day

Volatility gapped up on a bad earnings day but coudn't hold its high of the day.

ProShares Short VIX Short-Term Futures (SVXY)  is still hugging its 20DMA which remains an important feature of a downtrend

ProShares Short VIX Short-Term Futures (ARCA:SVXY) is still hugging its 20DMA which remains an important feature of a downtrend

At this point, I need to wait for another extreme move in volatility – a steep drop in ProShares Short VIX Short-Term Futures (SVXY) – before even thinking about fading volatility. I am increasingly wary of the on-going downtrend in SVXY marked by its declining 20DMA.

One of the Dow components causing trouble yesterday was Caterpillar, Inc. (NYSE:CAT). Apparently, plunging oil prices have caused serious challenges for CAT’s oil-based business. I think the following bullets points from Seeking Alpha speak volumes, especially the last point!

  • The oil price decline is the most significant reason Caterpillar (NYSE:CAT) expects a 20% cut in its earnings this year, particularly for its energy and transportation unit which makes compressors, pumps and turbines for oil and natural-gas companies, and is a negative for CAT’s construction business in oil-producing regions, CEO Doug Oberhelman said in today’s earnings call.
  • A stronger dollar also is hurting sales and will hurt U.S. manufacturers, although CAT’s global production footprint would help offset the impact, the CEO said.
  • “We are hopeful the guidance is conservative enough to provide a base level expectation for 2015, but it was a surprise even against lower expectations,” says William Blair analyst Larry De Maria.
  • If 2015 sales fall the company expects, it would be the first time since the Great Depression that CAT has experienced three consecutive years of falling revenues.

While I have been bearish on CAT since its breakdown in early December, I did not have my favorite hedge in place before earnings (a basket full of CAT puts). The small bounce ahead of earnings actually qualified for a fade, but I was being conservative in looking for a larger bounce. I have also been distracted by the market’s resilience in the face of CAT’s decline. I think of CAT as one of several indicators of market health, so the extended duration of the widening divergence between CAT and the S&P 500 is throwing my mental model for a bit of a loop. In other words, is the S&P 500 due for a major fall or will CAT instead soon launch a healthy relief rally?

Caterpillar (CAT) confirms the overall bearish tone of commodities

Caterpillar (CAT) confirms the overall bearish tone of the commodities space.

Apple (NASDAQ:AAPL) experienced sympathy selling that created less than ideal conditions for the quarterly pre-earnings trade. My analysis concluded a bearish response to earnings was the most likely outcome. I bought a weekly put and a put spread expiring next week. My idea was to provide the opportunity to profit greatly from a big decline and also to be ready for a slow drip downward.

At the time of my positioning, AAPL was “only” down 1.6% or so. By the close yesterday, AAPL was down 3.5%. This was definitely enough to qualify for profit-taking on the put option, but my limit sell order was set just a little too high. I will pay the price for relying on that setting to take advantage of a plunge into the close as AAPL produced gangbuster numbers for earnings. HOWEVER, the stock “only” managed in after hours to close yesterday's gap down.

AAPL needs to close ABOVE $114.50 to invalidate the topping pattern from the abandoned baby top (see chart below). More importantly, AAPL needs to gain some immediate follow-through to finally break through the bearish build-up I discussed in the pre-earnings analysis. I am also VERY wary of the extremes in optimism I now see in the stock.

Apple (AAPL) plunges into earnings as optimism wavers for a brief moment

Apple (AAPL) plunges into earnings as optimism wavers for a brief moment

The sympathy selling in tech was also enough to bring Google’s (NASDAQ:GOOG) spirited rally off recent lows to an abrupt halt. GOOG reports earnings on Thursday, Jan 29th. I do not have a GOOG-specific model for playing earnings ahead of time, but I will be primed to trade GOOG AFTER earnings.

Google's sprited rally off a double-bottom comes to an abrupt end

Google’s sprited rally off a double-bottom comes to an abrupt end with a fresh 50DMA breakdown

Daily T2108 vs the S&P 500
T2108 vs. the S&P 500 (DAILY)

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)

Weekly T2108
Weekly T2108

Be careful out there!

Disclaimer: long AAPL put and put spread

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