6/30/2011 9:02:04 AM
Greece's parliament approves Austerity Plan and Equities sell-off then rebound...
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Value Portfolio:
We are long TBT at $32.50 from June 16th. (TBT closed at $34.35 on June 29th)
We sold short one contract TLT July $98 Calls at $1.19 per share on June 16th
We sold short one contract TLT Aug $98 Calls at $1.80 per share on June 16th
We sold short one contract TLT Sep $98 Calls at $2.13 per share on June 16th
(TLT closed at $94.25 so the contracts we sold are nearly four dollars out of the money with price projected to move lower. Time value on all option contracts we sold continues to erode which means we can buy them back for less than we sold them for or, if this continues, let them expire worthless and keep all the money).
Daily Trading Action
The major index ETFs opened higher and immediately moved lower. Futures markets had been moving lower into the open and this was really just a continuation move. After reaching a bottom (in negative territory for the NASDAQ-100 and the Dow but not for the S&P-500) shortly after 10:00am, equities began to move higher. This move continued through the morning and through the lunch hour reaching an intraday high just after the lunch hour and by 1:45pm the bears seized control. They sold of equities steeply for forty-five minutes with the NASDAQ-100 moving back into negative territory. All three major indexes formed a higher low (intraday) and when the reversal to the upside happened just after 2:30pm, the move was strong into the close with the major indexes closing just a fraction below their intraday highs. This left all three major indexes closing above their 20- and 200-Day Moving Averages (DMAs). The Dow actually reached resistance of a down trend line dating back to May 2nd top. The Semiconductor Index (SOX 400.17 -0.35) closed with a slight loss. The Russell-2000 (IWM 82.20 +0.39) added a fractional gain and is now above its 20-, 50-, and 200-DMAs. The Regional Bank Index (KRE 25.29 +0.28) added more than one percent to close back above its 200-DMA. The Bank Index (KBE 23.94 +0.58) added more than two percent to close back above its 20-DMA for the first time since May 3rd. The Finance Sector ETF (XLF 15.29 +0.31) tacked on more than two percent and confirmed its move higher and closed at resistance. All equity indexes we regularly monitor are now in trading states. Long term bonds (TLT 94.25 -0.53) confirmed its downtrend with a fractional loss. TLT is in a downtrend state. NYSE trading volume was below average with 909M shares traded. NASDAQ share volume was below average with 1.752B shares traded.
In addition to the weekly crude oil inventory report, there were two economic reports of interest released:
- MBA Mortgage Index for last week showed a decline of -2.7%
- Pending Home Sales (May) rose +8.2% versus an expected fall of -0.2%
The first report was released two and a half hours before the open. The latter report was released a half hour into the session and helped to turn around the slide that occurred from the open. Since the housing sector has been dismal for so long, and this number surprised so much to the upside, it affected investor sentiment and shifted some from bearish to bullish on stocks and the economy.
Bank of America (BAC 11.14 +0.32) added to recent gains when an $8.5B settlement was reached for its Mortgage Backed Securities (MBS). Bank of America acquired Countrywide Financial when the (at the time) nation's largest mortgage broker was going under as the deflating housing bubble quickly soured the mortgage writing market. The settlement limits Bank of America's costs to settle which BAC will realize immediately which will free up the bank to proceed without this toxic overhang. This helped the Financial sector outperform from the open as other banks with similar exposure soared on the news.
Visa (V 86.57, +11.29) and MasterCard (MA 309.70, +31.47) added to strength in financials late in the session when a final ruling on the Durbin Amendment saw the interchange cap (which would have severely limited the profitability of card servicers) increased by the Fed.
The U.S. dollar shed another six tenths of one percent on a rise for the Euro. The rise in the Euro continues as Greece's parliament voted in favor of adopting the austerity measures necessary to meet requirements for an IMF/ECB bailout package.
The yield for the 10-year note rose five basis points to close at 3.10. The price of the near term futures contract for a barrel of oil rose $1.88 to close at $94.77. The weekly U.S. crude oil inventory report showed a draw down of 3.75M barrels.
Implied volatility for the S&P-500 (VIX 17.27 -1.90) fell ten percent and the implied volatility for the NASDAQ-100 (VXN 18.84 -1.87) fell nine percent. This left the VIX and the VXN closing below their respective 200-DMAs and support. While implied volatility can still increase on a short term basis, the trend is for a decline in implied volatility.
All ten economic sectors in the S&P-500 moved higher led by Financials (+2.1%), Materials (+1.5%), and Energy (+1.1%) with the "safe" sectors underperforming which suggests the risk trade is on.
Market internals were positive with advancers leading decliners 5:2 on the NYSE and by 9:8 on the NASDAQ. Up volume led down volume 10:3 on the NYSE and by 2:1 on the NASDAQ. The index put/call ratio rose +0.19 to close at 1.40. The equity put/call ratio rose +0.02 to close at 0.56.
Commentary:
Wednesday saw the market open modestly higher and the bears immediately began to "sell the news" of the passage of the Greek Austerity vote. That bearishness evaporated, however, as the markets have been so oversold that a relief rally saw heavier volume buying and it appears that more shorts are having to cover their bets as I suggested after Tuesday's weighty gains. Without financials weighing the market down, equities look more attractive than fixed income. Semiconductors actually lost a very modest amount on Wednesday and that important sector needs to come to the party. Much of Japan's natural disaster induced problems in the semiconductor industry seem to be behind it Japan's economy grew faster than expected. That hasn't yet seen a bid for U.S. semiconductor companies as of yet.
Now that the short term European sovereign debt concerns seem allayed, the focus will shift to the U.S. debt ceiling and posturing by Republicans and Democrats over this matter. The Republicans want to tie the vote to budget deficit reduction while U.S. President Obama wants to raise taxes on the wealthiest Americans. While both budget cuts and tax increases will be necessary to close the deficit, neither side will give in, as yet, because of the looming 2012 elections. This sort of irresponsible brinkmanship will cause more angst in global markets as the "full faith and credit" of the United States of America comes into question.
As we continue to remind our readers, we have been keeping our eyes on implied volatility and longer term bond prices. With the VIX and VXN moving definitively back below their 200-DMAs, the top in implied volatility is confirmed. The 20+ year bond ETF (TLT) made another move lower confirming its break of its 200-DMA. This shows capital leaving bonds in favor of equities. For now, we will remain long equities.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
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