Safe Trading Blog

Time to come back on our global view from the beginning of the week =>

Posted on April 15, 2008
Filed Under French Market, Stock Code Trading, US Market |

The situation is simple: Q1 season has come with 200 publications this week. If more than 60% can beat estimates, it will be a bullish trigger and I expect a good run of the stock market off season. In short, if in the middle of may, SPX is still above march lows, with a a reasonnable beat rate for Q1’s (let’s say above 60%), we can expect a bullish run for a few weeks…

Right now, my odds favour this scenario even if I stay deeply pessimistic on the longer term, before end of year… just one number P/E ratio for SPX is above 20 and the fair value of the index for a P/E of 15 would be around 950 pts!

But, let’s take events one after the others…

Many decisive Q1’s are already published with excellent news from CoCa, Google, INTC, IBM and bad but not dramatic from banks JPM, MERRILL…

We will make a complete overview soon with most important numbers  news on the street!

The most important for today is give solid elements to answer the basic question: how will the market read the tapes?

* Results are not so bad! we enter in a profitable territory, probably a beat estimates rate above 55%/60% if everything goes on like this week…

* the VIX has plunged below its SMA200 daily (remember our last post on the topic), which is a very positive sign for Stocks!

http://www.safetradingblog.com/stock-code-trading/a-word-on-the-vix.html

Our odds still favour a clear rebound, as anticipated at the beginning of the week, looking @ more hidden variables…

Do not miss the point: there will be some strong resistances on the way up, and we are still in a bear market territory… However, in the present period, we can make bets on the upside…

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Debrief @ 16h =>

CAC40 ~ +2% and US ~ +1.5% with NASDAQ leading the market @ +2%, which is a very positive trigger… NASDAQ/DOW is up! 

We have bought AAPL & INTC at the open to follow our analysis above for the very short term…

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Check our risk profile here:

http://www.boursematch.com/membre-stats.php?membre=Safe-trading

We are essentially keeping a reflection of our trades on this site, but the conditions are not so favourable: a long delay to get the execution, limited nb of products etc. However, it gives a reasonnable indication of the risk exposure and typical style that the StockCode can generate…

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To get a complete view of results via conference call transcripts, we give a short list of web links below (find more @ seekingalpha.com) =>

C: http://seekingalpha.com/article/72954-citigroup-inc-q1-2008-earnings-call-transcript

GOOG: http://seekingalpha.com/article/72846-google-inc-q1-2008-earnings-call-transcript?source=wildcard

IBM: http://seekingalpha.com/article/72588-ibm-q1-2008-earnings-call-transcript?source=wildcard

INTC: http://seekingalpha.com/article/72435-intel-q1-2008-earnings-call-transcript?source=wildcard

MERRILL: http://seekingalpha.com/article/72717-merrill-lynch-amp-co-inc-1q08-qtr-end-3-31-08-earnings-call-transcript

The situation is simple: Q1 season has come with 200 publications this week. If more than 60% can beat estimates, it will be a bullish trigger and I expect a good run of the stock market off season. In short, if in the middle of may, SPX is still above march lows, with a a reasonnable beat rate for Q1’s (let’s say above 60%), we can expect a bullish run for a few weeks…

Right now, my odds favour this scenario even if I stay deeply pessimistic on the longer term, before end of year… just one number P/E ratio for SPX is above 20 and the fair value of the index for a P/E of 15 would be around 950 pts!

But, let’s take events one after the others…

VIX & SPX trending in opposite direction, as usual (see plot below): indeed, VIX is a “contrarian sentiment” indicator… The recent bounce of the stocks is then visible as a fast drop on the VIX index.

On the plot, we also emphasize the major role played by the SMA200 on the VIX… The long term trend for the VIX is supported by this SMA & trending upward, which is bearish for stocks.

For now, we need to observe how this SMA200 will play: VIX support or not? If it breaks down, it would be a strong bull signal for stocks but the situation is unclear right now…

On 28/03 before the nice present rebound, we were writing:

“As developed in the previous posts, our confidence is improving on the market for the short term, even if it needs to be confirmed.

A key element is the situation on the mortgage business: the credit risk default has decreased the 2 last weeks by 25%. It means that things are evolving in the good direction: the confidence is increasing and then the credit default estimator is decreasing…

If we look at the SPX, we can track its situation with 2 simple numbers:

P/E ratio: 20  & the % of stocks above their 50 days moving average: 44% […]” (see post below)…. and the posts even before when we had anticipated the change in market mood!

It happens to be completely verified with the recent strong up direction of major stock indices, leaded by financials and retailers… We made a trade out of it these last days. Note also that money is flowing out of gold & bond positions into stocks again: this is an interesting balance that we need to follow over the next weeks…

It seems more likely that a test of the feb highs on the stocks is on the tape. It would be the decisive point: the bridge to win for bulls to prove their strength. Let’s observe how indices react today… As mentioned yesterday, we stay out of the market right now…

As developed in the previous posts, our confidence is improving on the market for the short term, even if it needs to be confirmed.

A key element is the situation on the mortgage business: the credit risk default has decreased the 2 last weeks by 25%. It means that things are evolving in the good direction: the confidence is increasing and then the credit default estimator is decreasing…

If we look at the SPX, we can track its situation with 2 simple numbers:

P/E ratio: 20  & the % of stocks above their 50 days moving average: 44%

With the earnings season in April, it is plausible that the P/E ratio starts decreasing. Right now, it is increasing for reasons that we have commented in previous posts.

An interesting sector within the large cap index is (as usual) the consumer staples (like WMT): P/E ratio of 18.5 with 69% of stocks above their SMA50-days, improving since last month…

Yesterday, we were discussing of stocks held by hedge funds =>

“…stocks most widely held by hedge funds are underperforming in easing FED cycles and gloomy economic periods! Indeed, these funds have to reduce exposure and decrease their leverage on their stock baskets => in general, these stocks are decreasing faster that the rest of the market…”

From this observation, we have extracted a possible portfolio…

Another idea would be to focus on stocks with the largest short interests: there are a lot of stocks with a short interest ranging from 40% to 70% of their float! Of course, these stocks have underperformed since the beginning of the year… It is quite obvious that any positive sentiment on the market will strongly reverse the situation. These shares will move sharply higher as shorts will need to buy back to cover their positions! We will come back later on this idea if we think that the conditions are gathered for some reasonable picks…

SPX and 10Y yield for the last 6 months: The correlation is perfect. It is quite natural but not always with such a high correlation degree.

You can check the 2 last rebounds of about 1M each… On this picture, the odds are again in favor of a continuation of the upside as long as TNX has not reach a level of about 3.8%… (3.5% today)

It will be chaotic and it is plausible that we stand @ about half the present rebound duration?! Let’s observe the forces in the next days…

Reminder of our trading scenario: 

“The short term rebound develops chaotic waves: SPX have moved back below the 1350 pts target… as well as financials have been stopped at resistance level (JPM is a good example). My odds are still positive & I expect a break of these resistances, but we need confirmation today. If yes, the rebound would find a new strength. Very important: check the 1350 pts level on SPX, this is the key technical number for the following…”

We are still waiting for the confirmation… but the odds are still in favor of the recovering of the upside. Stay defensive, our 2 lines are on the Fr markets: CA & SAN. We are ready to be more agressive on the US as soon as our triggers will give the signal.

Let’s start from the observation that stocks most widely held by hedge funds are underperforming in easing FED cycles and gloomy economic periods! Indeed, these funds have to reduce exposure and decrease their leverage on their stock baskets => in general, these stocks are decreasing faster that the rest of the market… plain & simple.

However, in a recovery move, the situation is inversed! obvious… Then, I expect a higher speed uptrend for these kind of stocks (held in hedge fund baskets). There are many choices, but I have made a defensive spread selection (covering major economic activities) also based on technical indicators and short interests:

CSX industrial

ABI health care

TIE material

RDC energy

AIZ financial

OMX consumer discretionary

This basket can be bought (with a certain risk appetite) when the rebound will recover (remember our key level of 1350 pts on the SPX)… 

See previous posts today: We have a positive bais concerning a continuation of the rebound… Worth playing the upside in case of validation of the break out of the 1350 pts level on the SPX!

We follow this plan with the idea also that consumer staples & health care are outperforming within uncertain periods: Ready to buy SAN & CA & FTE… & watching DG & financial sector for some other picks?! done on SAN & CA (@ the lows of the day)

We get ready for the US opening also => wtach list: WMT, IBM, HP & OMI…

Keep an eye on the whole BTK sector also.

For the US, wait for the confirmation that the market is running up…