ONE-TWENTY TWO - A collection of personal articles on financial markets including analysis you can use
Apr
15

T2108 Update (April 15, 2014) – A Perfect Bounce – Maybe Too Perfect

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 45.8%
VIX Status: 15.6
General (Short-term) Trading Call: Short (fade rallies). See caveats below.
Active T2108 periods: Day #196 over 20%, Day #48 over 40% (over-period), Day #4 under 50% (under-period), Day #4 under 60%, Day #8 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
You could not make this stuff up even if I tried…and I am guessing I will look back on April 15th, a day affectionately known as “tax day” in the U.S., as a pivotal trading day.

The morning looked awful as sellers quickly reversed the sharp pop that ended Monday’s trading and delivered the predicted oversold bounce. As has become standard fare, the NASDAQ (QQQ) and its high-tech, high-flying, highly valued kin were some of the hardest hit by the selling. By the low of the day, the NASDAQ could see the whites of the eyes on the 200-day moving average (DMA). At that point, almost like magic, the buying kicked in.


The NASDAQ bounces perfectly off 200DMA support

The NASDAQ bounces perfectly off 200DMA support


The NASDAQ last touched its 200DMA around the start of 2013. That duration is a testimon to the strength of the rally. My main regret is that I could not be present to take a stab at playing such a momentous occasion.

This bounce looks almost too perfect, but it matches well with a massive busting of stops at the intraday lows for the year (see the black, thick horizontal line). Assuming stops were taken out, a bunch of reluctant sellers may have just paved the way for a bunch of buyers eager to jump into the breach.

Of course the buying helped the S&P 500 (SPY) as well. The index surged right into its 50DMA resistance before trading closed for the day. Net-net, if it were not for that ominous 50DMA, the S&P 500 would still look barely phased by the current selling. Compare and contrast: the NASDAQ has a noticeable “sag” from its recent 11-year or so high, creating a short-term downtrend. The S&P 500 on the other hand has barely budged from the land of “churn” off its recent all-time highs.


The S&P 500 bounces right back into its 50DMA as it becomes the stubborn index

The S&P 500 bounces right back into its 50DMA as it becomes the stubborn index


With T2108 coming off the 40% level and starting to form what looks like a series of higher lows, it is time to take the foot off the pedal on bearishness. The sell-off has left a lot of overhead room for a fresh wave of buyers who want to snap up “bargains.” Accordingly, I am not adding to the small number of QQQ puts I bought Monday to fade the oversold bounce. (I sold my EEM puts into today’s selling). I will ride my recent nibbles on some momentum names. I will not look to fade again until the NASDAQ hits its now sharply downtrending 20DMA and/or the S&P 500 challenges all-time highs again.

Finally, the VIX is showing signs it is topping out again. While it remains above the 15.35 pivot, it looks like it is running out of gas for this cycle. I am clinging tightly to my UVXY puts…


The VIX may have already topped out for this cycle

The VIX may have already topped out for this cycle



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
*All charts created using
freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SSO puts, long QQQ puts, long QID calls, long UVXY puts

Apr
15

Internet Stock Valuation Update: Shaved Around the Edges

written by Dr. Duru
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Here is a very quick tax-day valuation update on select Internet-related stocks. The ordering of stocks by price-to-sales (P/S) ratios did not change much but several stocks have retreated off their most stretched valuations. However, nothing that WAS “expensive” has suddenly become “cheap” now…

Click image for details…


Price-to-Sales Ratios of Various Internet-Related Companies From March 6, 2012 to April 15, 2014

Price-to-Sales Ratios of Various Internet-Related Companies From March 6, 2012 to April 15, 2014


Source: P/S data from Yahoo Finance

{I am also just realizing that I have not been including Netflix (NFLX)! It has a P/S ratio of 4.53, placing it smack in the middle of the pack right now}

Be careful out there!

Full disclosure: short FB, long FB call spread, long TWTR, long AMZN, long LNKD, long NFLX call spread, long ZNGA, long MM (note well, still bearish overall the market. All the long positions here are very speculative plays on an eventual bounce even as I continue buy puts on QQQ, calls on QID, and fade bounces on other high-flying tech/internet stocks. FB short is now a bet that it has topped. Long ZNGA and MM are leftover disasters!)

Apr
15

T2108 Update (April 14, 2014) – A Timid Bounce From Oversold Conditions

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 43.4%
VIX Status: 16.1
General (Short-term) Trading Call: Short (fade rallies)
Active T2108 periods: Day #195 over 20%, Day #47 over 40% (over-period), Day #3 under 50% (under-period), Day #3 under 60%, Day #7 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
Quasi-oversold conditions were so solid that even General Motors (GM) bounced on Monday, April 14, 2014. The stock once again demonstrated the potential in playing reversals from over-extensions beyond Bollinger Bands (BB). The stock gained 1.9%, closing right at its lower-BB.


General Motors bounces back from an over-extended move

General Motors bounces back from an over-extended move


T2108 also bounced back by closing right at its lower-BB at 43.4%. The S&P 500 (SPY) recovered almost all its losses from Friday although it was not a sure thing by any stretch. The index opened well and held into lunch. With bellies full, traders proceeded to sell hand over fist again. Amazingly, after punching out new lows for the day, the S&P 500 sprinted into the close and within a hair of its high on the day. This bounce saved the T2108 Trading Model’s (TTM’s) prediction for an up day. In the last T2108 Update, I neglected to mention that if Monday opened with a gap down, I would buy for a (hopefully) quick trade. With the TTM’s strong prediction, I definitely was not going to try chasing the market downward. A gap down would have provided a good risk/reward play given the prediction. The strong open compelled me to fade (note that the TTM only predicts one day out).

I post the intra-day chart below in case I need to refer to today as a major turning point.


A late bounce made all the difference for the stock market

A late bounce made all the difference for the stock market


The late sprint did not quite return the NASDAQ (QQQ) its Friday losses. Per the trading call and the strategy I discussed in the last T2108 Update, I faded the bounce. I also made the switch from PowerShares QQQ (QQQ) puts to ProShares UltraShort QQQ (QID) call options. This is a first tranche, and I will fade more if the major indices continue bouncing into overhead resistance: the 50DMA for the S&P 500 and, for now, the rapidly declining 20DMA for the NASDAQ.

This is a holiday shortened week, so I am suspecting the rest of the way through Thursday may be pretty calm. In the meantime, I am mulling over what trading strategies could work on IPOs. In “Is hot market for IPOs cooling“?, I discovered some great IPO-related statistics and an IPO-related ETF I had never heard of before: Renaissance IPO ETF (IPO). IPO provides broad exposure the the last two years of new issuance. It is probably no accident that IPO was released into the market shortly after IPOs in this category gained an astonishing 63.3% in 2013. That kind of performance is unlikely to get repeated for a while.


Renaissance IPO ETF (IPO) comes tumbling back to earth

Renaissance IPO ETF (IPO) comes tumbling back to earth


Interestingly, since its inception, IPO has performed just as well as the NASDAQ and PowerShares S&P 500 High Beta (SPHB). Even MORE fascinating is the near inverse performance of iShares MSCI Emerging Markets (EEM) over two key periods. I see the beginnings of some trade ideas here. Stay tuned…


High beta, high risk has traded together since at least October. EEM sticks out as going the opposite way in two key periods.

High beta, high risk has traded together since at least October. EEM sticks out as going the opposite way in two key periods.



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
*All charts created using
freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SSO puts, long EEM calls and puts, long QID calls, long SPHB

Apr
12

An Unexpected Drop In Leasing Velocity Helps Reset RealPage

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on February 25, 2014. Click here to read the entire piece.)

RealPage (RP) provides software for revenue management and other related services for managers of rental housing. After noticing that the stock had dropped over 20% in after hours trading following the release of the latest earnings numbers, I decided to listen in on the earnings conference call. I wanted to understand whether RP’s troubles had anything to do with changing economic conditions in the rental market or whether they could be extrapolated out to housing in general. The final word on that is still uncertain, but I found the report interesting anyway.

A shortfall in “organic” on-demand revenue growth is RP’s main headline from fourth quarter earnings. Not only did the year-over-year growth of 12% miss the company’s target of 20-25% by a wide margin, but also RP warned on financial performance for the year. The fourth quarter miss ended thirteen straight quarters of 20%+ year-over-year growth since RP’s IPO. RP noted that three of the main negative factors impacting the business are likely to turn-around by this year’s fourth quarter.

{snip}

{snip}

I was most interested in RP’s description of how a slowdown in leasing velocity impacted its business; leasing velocity accounts for about 18-19% of RP’s on-demand revenue (not clear whether this is organic or all-inclusive). RP was not clear on how or when this negative impact will turn around. According to RP, rental managers emphasized renewals over resident churn in the fourth quarter despite “record levels of occupancy…driven by extraordinary levels of demand and inadequate supply, especially in the middle market assets as the majority of new construction is high-priced Class-A properties.” Under these conditions, RP expected rental managers to prefer to sign new renters at higher lease rates. {snip}

Needless to say, I will be watching RP much more closely in coming quarters to see how this issue of leasing velocity unfolds. I will be particularly keen to understand any broader economic implications.

{snip}


A post-earnings plunge to the bottom of the current trading range

A post-earnings plunge to the bottom of the current trading range


Source: FreeStockCharts.com

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on February 25, 2014. Click here to read the entire piece.)

Full disclosure: long RP

Apr
12

T2108 Update (April 11, 2014) – Continuation Selling Quickly Brings Back Quasi-Oversold Conditions

written by Dr. Duru
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(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)

T2108 Status: 40.9%
VIX Status: 17.0
General (Short-term) Trading Call: Short (fade rallies), quasi-oversold conditions described below
Active T2108 periods: Day #194 over 20%, Day #46 over 40% (over-period), Day #2 under 50% (under-period), Day #2 under 60%, Day #6 under 70%

Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar).

Commentary
At the current rate of selling, the market should be oversold, not just quasi-oversold, by the end of the week.

T2108 closed Friday, April 10, 2014 at 40.9%. This move capped a massive 2-day plunge of 31.9%, much larger than the drop which generated quasi-oversold conditions in the previous week. The T2108 Trading Model (TTM) produces 100% odds for a bounce on Monday. Note well that these odds come from 11 cases out of 138 quasi-oversold conditions since 1990 where T2108′s 2-day drop was at least 31.9%. The matching classification criteria consist of a 1-day change in T2108 below -8.9% and a T2108 close above 38.8%. The classification error is better than last time at 39.4%, but it remains too high. So, again, take this prediction more as guidance NOT to chase the market lower than to buy aggressively.


T2108 itself is overextended as it pushes well below its own lower-Bollinger Band

T2108 itself is overextended as it pushes well below its own lower-Bollinger Band


The chart of T2108 suggests that my favorite technical indicator is over-extended and due for a bounce. Note that bounces have occurred after every recent puncture to such levels. Also note how T2108 is making higher lows since oversold conditions last occurred (June, 2013). These observations lead to a very important implication: if the market is still in bull mode, an upcoming bounce from over-sold conditions could be sustained for weeks to come…that is a caution to the bears. I will consider a break below 35% to add yet one more solid confirmation that the market has topped out for a good while. That is the caution for the bulls who will likely be very quick to buy into a bounce next week.

Another technical perspective to balance out the T2108 observations is SwingTradeBot, a stock alert platform built by my old-time mentor TraderMike (he’s back!). He provides a great summary of stocks making bearish and bullish technical milestones. Another click provides the list of those stocks for trading consideration. While T2108 dropped at a larger percentage than the previous day, the number of stocks making fresh bearish signals contracted (there is some work to do to filter on inverse ETFs which of course provide the reverse trading signal). I post the pie charts below (he is still working on getting the color-coding working). Click the charts for more details. I am assuming a contraction in bearish signals is confirmation that downward momentum is more likely to reverse in the very short-term.


Technical breakdown for Thursday, April 10, 2014

Technical breakdown for Thursday, April 10, 2014



Technical breakdown for Friday, April 11, 2014

Technical breakdown for Friday, April 11, 2014


I used the bounce from the last quasi-oversold condition to close out some fortunately timed longs and call options. I did not get aggressive with shorts because I preferred to wait for a third day into the bounce. But, as I stated, I did purchase puts on the PowerShares QQQ (QQQ) as my focus has shifted from ProShares Ultra S&P500 (SSO). Seeing the quasi-oversold conditions, I closed out all those puts into Friday’s selling. I also unloaded a SSO put option with a June expiration and closed out short positions in Google (GOOG) and Tesla (TSLA). The next time around, I will like target the ProShares UltraShort QQQ (QID). Check out how volume has SURGED since last January. Perhaps this was an early signal for the beginning of the end of momentum!


A surge in interest in leveraged shorts on the NASDAQ

A surge in interest in leveraged shorts on the NASDAQ


The sell-off has reached a new level of criticality. The S&P 500 (SPY) finally dropped below its 50DMA. The NASDAQ gapped down, rallied and then faded again to close near the converging support of 2014 intraday lows and its 200DMA. Astute technicians will notice that Thursday featured “continuation” selling that confirmed more downside was likely coming.


The S&P 500 finally cracks

The S&P 500 finally cracks

The NASDAQ hurtles toward critical, converging support

The NASDAQ hurtles toward critical, converging support


Looking at these charts, I like starting the next fades on a S&P 500 retest of the 50DMA and 4100 or so on the NASDAQ.

I used Friday’s sell-off to finally close out my long position in ProShares Ultra VIX Short-Term Fut ETF (UVXY). This second trip was another experience in high risk and small reward. Even worse, it took three tranches of buys this time to get the small reward. Needless to say, I am pretty much done with UVXY. I sold out with UVXY hitting its 50DMA. I promptly turned on it and started in on UVXY puts to play the inevitable gravitational pull. I am much more comfortable using UVXY puts as a hedge on other short positions than using UVXY shares as a hedge on other long positions.


Like QID, a steady surge of trading volume (and interest)

Like QID, a steady surge of trading volume (and interest)


Finally, some chart reviews. Going forward, SwingTradeBot will likely become an increasing source of my scans for interesting charts. To-date I collect charts from my own small watchlists and some browsing of stocks in the news. I think the pictures speak for themselves along with the short captions. I follow the charts with a brief summary of trades I have done with these stocks.


IBM is maintaining relative strength against the market

IBM is maintaining relative strength against the market

It looks like Intel (INTC) is finally succumbing to selling pressure. A near relentless uptrend ended with continuation selling on Friday

It looks like Intel (INTC) is finally succumbing to selling pressure. A near relentless uptrend ended with continuation selling on Friday

Voxeljet AG (VJET) must have REALLY needed the money as the company tanks its stock to fresh lows on a stock offering at $15

Voxeljet AG (VJET) must have REALLY needed the money as the company tanks its stock to fresh lows on a stock offering at $15

Netflix (NFLX) failed to hold support at its 200DMA and gap fill

Netflix (NFLX) failed to hold support at its 200DMA and gap fill

Zillow (Z) sold off on Friday, but this is one momentum stock that has somehow managed to maintain its primary uptrends at BOTH its 50 and 200DMAs

Zillow (Z) sold off on Friday, but this is one momentum stock that has somehow managed to maintain its primary uptrends at BOTH its 50 and 200DMAs

Sarbucks (SBUX) continues its breakdown with a fresh 8-month closing low

Sarbucks (SBUX) continues its breakdown with a fresh 8-month closing low

VMWare (VMW) has not suffered the 20% or more losses from recent highs but it has finally given up 50DMA support

VMWare (VMW) has not suffered the 20% or more losses from recent highs but it has finally given up 50DMA support

Uh oh. Is the bond market sniffing trouble too? iShares 20+ Year Treasury Bond (TLT) looks ready to break out

Uh oh. Is the bond market sniffing trouble too? iShares 20+ Year Treasury Bond (TLT) looks ready to break out

GM is breaking down in a classic bearish pattern

GM is breaking down in a classic bearish pattern


IBM: I WISH I had stuck with my call last November by buying and holding shares. Instead, I do not even find myself holding call options as IBM has finally proven my old thesis correct that a time would come when traders would look for “cheap” stocks like IBM. I got more caught up in playing IBM like a trading range.

Intel (INTC): I still like INTC on the long side. I sold call options early in the week as part of a new strategy to buy and sell Intel between earnings. After two successful rounds, I am almost ready to write about it.

Voxeljet AG (VJET): Looks like VJET’s days of riding the momentum in 3D printing are over for now. I went ahead and bought on Friday’s plunge because I often find success buying a stock when it drops to the price of a share offering. Plunging well below the lower-BB is an added bonus. There is a lot of incentive baked into this situation to make sure these generous investors get rewarded for their agreement to fund the company. VJET was particularly accommodating in issuing stock at a (relative) firesale. This is a trade for a bounce.

Netflix (NFLX): I am of course disappointed the stock could not hold support, but I am sticking with the May call spread. Upcoming earnings will likely make or break this position now. Even if I did not have my current position, I would NOT short NFLX on this breakdown. Next up is the 2014 low…which could mess with the little optimism I am clutching.

Zillow (Z): This is clearly a stock to own whenever the market starts loving momentum stocks again. In the meantime, it looks like a stock that can still be played off support and a general uptrend. The wild volatility along the way gives opportunities for bulls AND bears.

Starbucks (SBUX): I wish I still had my short position! My trade in SBUX was very sub-optimal. I first shorted it as a chase downward on the first breakdown from its 200DMA. I failed to make any further trades despite the opportunities to add to the position at better prices. I achieved a small reward barely worth the risks I took.

VMWare (VMW): I have not touched this one in a while, but it has been one of my preferred tech stocks to buy on dips. I have put it back on the radar now that it has finally started breaking down. A tumble to the 200DMA would be a gift.

iShares 20+ Year Treasury Bond (TLT): I have maintained a “strangle” on TLT with out of the money puts and calls in anticipation of some big move either way. It looks like the big move could be a breakout.

General Motors (GM): One word: “ugly.” The stock has the classic pattern of a good short. It broke down below its 200DMA on February 3rd to signal/confirm growing weakness. After struggling with 200DMA resistance it finally broke out only to quickly fail at 50DMA resistance. The subsequent plunge below 200DMA confirmed the stock as a good short. More churn and another 50DMA failure set-up the current sell-off. Friday’s plunge is the exclamation point to sell this stock (on rallies). I do not even think I need to map out the bearish headlines on this chart. It simply speaks volumes on its own. (Disclosure: I drive and LOVE a GM vehicle, my second one in a row using credits from purchases on a GM credit card. I stopped using the card after my last purchase as I suspected I did not want to feel compelled to buy a third GM car in a row whenever the next moment comes!).


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
*All charts created using
freestockcharts.com unless otherwise stated

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SSO puts, long NFLX call options, long VJET, long UVXY puts, long TLT calls and puts

Apr
10

Opportunistically Invest In Cocoa

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on February 24, 2014. Click here to read the entire piece.)

On Friday, February 14, 2014, Nightly Business Report produced a timely segment on chocolate and the strong growth in worldwide demand that challenges global supplies. My ears really perked up when the segment suggested that prices of chocolate could go up as a result. I have been noticing the recent price run-ups in several agricultural commodities, and I wondered whether cocoa, the prime ingredient in chocolate, was about to experience a similar run-up. However, it turned out the story was a bit over-simplified, at least on the supply-side, and the investment thesis is tricky.

The supposed problem with supplies is that the majority of cocoa beans come from West Africa “…a region impacted by harsh weather and political instability.” This raised my eyebrows because it sounded like a boilerplate refrain lacking an update from current conditions.

So, it is probably a lot more accurate to say that cocoa supplies can be vulnerable to political instability and poor weather conditions. Of course this warning can apply to a whole host of agricultural commodities grown across the planet. This volatility that comes with agricultural commodities makes investment most compelling in times of surplus when prices are at temporary discounts. Ultimately, the secular story of cocoa hinges on the demand side where trends are much more stable and not dependent on the unpredictability of weather or politics.

{snip}


World cocoa bean production, grindings and stock

World cocoa bean production, grindings and stock


Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics, Vol XXXIX, No. 4, Cocoa year 2012/2013

The consistent demand growth, and the potential for accelerated growth in coming years, provides the baseline investment/trading thesis. This demand supports the rationale for buying when prices are at lows due to surplus conditions.

Nightly Business Report described cocoa demand in terms commonly used to explain increasing demand for many commodities: wealthier citizens and a growing middle class in emerging markets. {snip}

{snip}


NIB vs CHOC: Nearly identical twins

NIB vs CHOC: Nearly identical twins


Source: FreeStockCharts.com

{snip}


While cocoa has been volatile in short stretches of time, it has gone almost nowhere for the last 23+ years

While cocoa has been volatile in short stretches of time, it has gone almost nowhere for the last 23+ years


Source: NIB prospectus

I started this investigation with the implication from the Nightly Business Report that chocolate is experiencing growing demand versus constrained supply thus potentially much higher prices in the future. What I found instead is a more nuanced story of growing demand and volatile supply. The investment thesis is thus opportunistic and that window (for going long) appears to still be open for now.

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on February 24, 2014. Click here to read the entire piece.)

Full disclosure: no positions

Apr
10

Apple’s Post-Earnings Buyback Fails to Sway Growing Negative Sentiment In Stock

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

On February 6, 2014, the Wall Street Journal reported that Apple (AAPL) had snatched up $14B worth of its own stock following January’s post-earnings sell-off: $12B in an accelerated buyback and $2B in the open market. In the interview, Apple CEO Tim Cook touted how the $40B spent by AAPL to buy back stock in the past 12 months is a public company record over such a timeframe. This news likely helped AAPL run-up another 6.5% over the next 8 (calendar) days. Forbes recently provided some great perspective on the enormity of AAPL’s recent spate of buying:

{snip}

Despite the impressive scale of these purchases, they surprisingly failed to sway the growing negative sentiment in the stock. Indeed the complete reversal of those gains “post-news” over the subsequent 8 days may have its root in that negative sentiment.


Apple's post-earnings recovery hits a brick wall

Apple’s post-earnings recovery hits a brick wall


Source: FreeStockCharts.com

There are many ways to look at the negative sentiment that still holds a strangle on Apple’s stock:

  • Despite a year of buybacks, AAPL still trades right where it did before the post-earnings collapse in January, 2013.
  • The announcement of the deal with China Mobile failed to generate any follow-up momentum and is now the top of the current downtrend. This downtrend is starting to get defined by a downward sloping 50-day moving average (DMA).
  • As stated above, all the gains following news of Apple’s accelerated buyback and open market purchases were reversed in the same time it took to generate those gains.

These are all observations from the price chart. There are other clues. A Bloomberg article reporting on Apple’s annual shareholder meeting referenced a Morgan Stanley report calculating that Apple’s top 30 institutional holders held just 30% of the company’s stock. This share is a record low and is down from the peak of 40% in 2009. Even more telling could be the action in short interest and the open interest put/call ratio.

Short interest in AAPL is still a very small 3% of float. However, it is back to a 7-month high and soared from 16.5M as of January 31, 2014 to 26.4M as of February 14, a very surprising 60% increase even 8 days after the news of AAPL’s purchases. Shares short had been relatively stable since dropping to 17.6M on August 30, 2013.

The open interest put/call ratio has also soared in recent weeks providing a 1-2 punch of negativity in combination with the soaring short interest. {snip}

{snip} However, the current trading behavior in Apple’s stock suggests it will meander until April’s earnings report, perhaps even retest post-earnings lows before that point. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on March 2, 2014. Click here to read the entire piece.)

Full disclosure: long AAPL shares and call options

Apr
10

The Twitter Post-Earnings Trade Pivots On Increasingly Negative Sentiment

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on February 14, 2014. Click here to read the entire piece.)

Twitter (TWTR) dropped 24% after reporting much anticipated earnings on February 5th. This drop completed a quick journey from a “crescendo top” that I described (fortuitously) in late December. Shortly afterward a reader commenting on the article projected that TWTR should fall below $50 soon. I responded as follows:

” I am not so sure. $50 is nice technical support. I wrote about it here: http://bit.ly/1lEYPTS
Will write an SA article about my changed outlook soon.”

I decided to read through the Seeking Alpha transcript for the earnings call before writing the follow-up. What I learned and now understand firms up my belief that $50 should hold as support at least as long as the overall stock market remains in a bullish mood. I am much less comfortable with Twitter’s premium, sky high valuation (at the time of writing 31x sales and tops in the internet universe that I track), so I have designated TWTR as a trading stock, not an investment stock. {snip}


Twitter may have finally found support at $50 after a crescendo top just under $75

Twitter may have finally found support at $50 after a crescendo top just under $75


Let’s review a quick set of earnings highlights that define the opportunity going forward. {snip}

I will say that I am overall impressed with Twitter’s ability to turn out a (non-GAAP) profit that beat expectations despite severely disappointing on user growth expectations (30% year-over-year and 4% quarter-over-quarter; U.S. monthly active users grew 21% and 3% respectively). If even half of TWTR’s various initiatives and product experiments succeed, the company could develop the kind of revenue and then earnings growth that analysts need to issue upgrades and positive views. Currently, analyst consensus is extremely bearish on TWTR. {snip}

The big knock on TWTR’s report was the disappointingly low user growth in the fourth quarter. TWTR left the prospects for future user growth in great doubt during the Q&A session. {snip}

{snip}

Oddly enough, TWTR also claimed that it is confident it can “accelerate its user base” in 2014, and “…it will be a combination of changes introduced over the course of the year that we believe will start to change the slope of the growth curve.” So, TWTR is assuming user growth will not change much this year, but it is hoping its assumptions prove far too conservative.

No wonder then the stock dropped as much as it did the day after earnings. Anyone who eagerly plowed into the stock ahead of earnings, especially during the spectacular run-up to the crescendo, likely sold immediately. That wash-out of sellers set up the opportunity for the bounce off $50 support – almost like the wash-out of overly enthusiastic buyers at the crescendo top. {snip}

Almost everything else TWTR had to say during earnings described a company hard at work experimenting, innovating, and developing. For example…

{snip}

After valuation, my biggest concern with TWTR is the amount of money it is spending on stock-based compensation. I had this same concern with Groupon.com (GRPN) in its early post-IPO days. {snip}

{snip}

Ahead of observing the reception for the gift of more shares, there are other metrics for assessing sentiment. The crescendo top occurred at a time with negative analyst sentiment and rising short interest. Both metrics of sentiment have gotten worse: analysts are even more negative (as noted above) and short interest continues to soar. {snip}

While negativity is not at an extreme yet, the earnings disappointment effectively catalyzed a short-term relative extreme. {snip}


Traders sell ahead of presentation at Goldman Tech conference

Traders sell ahead of presentation at Goldman Tech conference


Source for charts: FreeStockCharts.com

{snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on February 14, 2014. Click here to read the entire piece.)

Full disclosure: long TWTR put options

Apr
10

Exactly Nowhere for the U.S. Dollar Year-To-Date Hides Some Subtle Signals

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on February 25, 2014. Click here to read the entire piece.)

So far, 2014 has included more angst about emerging markets, a large (and temporary) spike on volatility, a sharp rally in bond prices, and an impressive (counter-trend) rally in gold. Through all the excitement, the dollar index (UUP) has just plodded along. In fact, it closed today exactly where it ended 2013.


A tightening trading range for the U.S. dollar index

A tightening trading range for the U.S. dollar index


In an aptly titled segment called “What’s stopping the dollar?”, Hard Currency (form the Financial Times) explored why the dollar has defied 2014 analyst expectations for a rally. Matt Cobon, head of rates and currencies at Threadneedle Investments, explained that the economic data have been so far a bit softer than expected. However, the U.S. dollar is also not selling off on these data because expectations remain set at above trend growth. {snip}


The S&P 500 has generated a high number of signals as it has churned heavily through and around all-time highs

The S&P 500 has generated a high number of signals as it has churned heavily through and around all-time highs


Source for charts: FreeStockCharts.com

The tightening trading range on the U.S. dollar defies attempts to do anything beyond the broadest set of correlations to other financial instruments. {snip}

{snip}

In other words, it may be that, for now, correlation matters much less than non-confirmation.

As the market scrapes at the same overbought levels that proved to be a ceiling on January 23rd, I find myself once again watching the dollar index for subtle clues. I will take sharp notice if the dollar index somehow manages to break the lower part of its trading range on, for example, poor economic data: such a move would mark a dramatic change in existing trading patterns. Stay tuned… {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on February 25, 2014. Click here to read the entire piece.)

Full disclosure: net long U.S. dollar index, long GLD, long SSO puts, long AUD/JPY

Apr
10

Poor Wholesale Sales Deliver An Excuse to Sell the Canadian Dollar

written by Dr. Duru
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(This is an excerpt from an article I originally published on Seeking Alpha on February 20, 2014. Click here to read the entire piece.)

Since reaching an inflation-adjusted high (at the time) in May, 2012, Canada’s wholesale sales have been relatively stagnant except a one-month surge the following May that beat the high (I used the data file available in the latest report). For example, wholesale sales in November, 2013 were exactly the same as they were in April, 2012 (again, inflation adjusted). The DailyFX ranks the importance of Canada’s wholesale sales report as low for forex traders. Combining these two observations, I was extremely surprised to see the Canadian dollar (FXC) sell off so dramatically in response to December numbers that missed “expectations.” {snip}


Canada's wholesale sales take a plunge amidst recent stagnation

Canada’s wholesale sales take a plunge amidst recent stagnation


Source: Statistics Canada

{snip}


USD/CAD surges off its 50-day moving average (DMA) in response to Canadian wholesale sales numbers

USD/CAD surges off its 50-day moving average (DMA) in response to Canadian wholesale sales numbers


{snip}


The U.S. dollar index bounces near the botom of its current range helped formed by its "QE2 reference price"

The U.S. dollar index bounces near the botom of its current range helped formed by its “QE2 reference price”


Source: FreeStockCharts.com

So it seems the poor wholesale sales numbers were just an excuse to trigger what might simply be a technical move in USD/CAD. {snip}

Be careful out there!

(This is an excerpt from an article I originally published on Seeking Alpha on February 20, 2014. Click here to read the entire piece.)

Full disclosure: no positions

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