The "well-balanced" ancient Eastern philosopher might see the well lit side of the hill that shrouds the backside in darkness. Intellects refer to the yin and the yang. My grandmother, who may have been the wisest among them, would have said simply.. "You take the good with the bad." It's never that hard to see reason for optimism, nor is it very difficult to feel pessimistic. This, you and I control. My feeling? One can never taste victory, or at least enjoy doing a good job, unless one has known, and properly respects defeat. Effort, to the pure of heart has a way of eventually creating good fortune. Not immediately. Maybe not where or toward what aim that effort had originally been intended.
Once understood, the environment comes into focus. There are both qualities and questions concerning everyone you meet. There is a silver lining in every cloud, even if that silver lining is simply a required education. In fact, the learning process becomes the prize. Learning to cope. Learning to adapt.
For, when victory comes easy, the path beyond becomes more likely to frustrate. When victory itself is difficult, what comes next is better understood. Only a student can become a master. Only a master able to remain a student is worthy of responsibility weighted with leadership. How honest to understand strength without exaggeration. How honored to realistically assess weakness. Oh, what joy to seek and find flaw in fact already thought to be understood. The passion of the moment will pass into sentient vigor. The grace of example set will then guide.
Some will see Tuesday as a negative. Almost all U.S. equity indices gave up three quarters of one percent, give or take. All 11 sectors closed in the red one day after all 11 closed in the green. Know what I saw? Yes, I saw the late selloff into the close. This pattern has occurred for a number of consecutive days now, and is clearly (I think) programs provoking other programs. It will run it's course.
What I saw was an absolutely shocking lack of trading volume. Monday trading can be light. No doubt. Tuesday trading that lands in aggregate more than 6% (NYSE), and more than 10% (Nasdaq) lower than on Monday, confirms for me something that I had pondered over the weekend. This makes four straight sessions of declining volume. Tuesday was the first "down day" among them. Broad fund participation is obviously missing. This to me, at least for the moment, concerns that there is no concentrated bias among managers. We can not with any degree of certainty confirm trend.
Most of these fund managers would probably rather wait for Jackson Hole or perhaps beyond. Thinner volume will enhance short-term volatility, if enhance is the right word. My positive take would be that the broader indices remain close enough to their respective 50 day SMAs to make another run.
Why do we watch the 50 and 200 day simple moving averages more than any others simply created out of thin air? Easy. A certain number of risk managers watch these two lines, and force enough portfolio managers to either add to, or subtract from, exposure at those levels. You want to see increased fund participation in any single security? Cross one of those lines and then watch it become either resistance or support, as the reaction is now more algorithmic than thoughtful. Oh, by the way, that leads me to one of my pet peeves.
Trading volume is typically lighter in late August. Undoubtedly, some talking head appearing today at your favorite media outlet will cite market participants being on vacation as a reason for this phenomena. Hogwash. A very small percentage of trading in the year 2019 is subject to minute by minute human decision making. There is some "vacation" impact, but not like there was in the days of the centralized auction market.
In those times, human clients called human brokers who called human sales traders who called human floor traders who physically approached a human specialist and other human floor traders at a specific point of sale. Got all that? Every order was exposed at the discretion of the floor trader depending on the intent of the portfolio manager. The specialist in the security and other floor traders had to respond to new interest in real-time, using their heads. There was no going back to the phone for instructions. Trades were recorded by hand. There was no internet. Nothing was automatic. You were either good under pressure or you were not. Our trades were measured in minutes. Trades today are measured in micro-seconds because milliseconds were way too slow. Apple and oranges, gang. The powers that be made a decision years ago to prioritize speed over price discovery. Be careful what you wish for.
The result is simply that even if traders do go on vacation they can be reached wherever they are. Just try, even on vacation, to take more than 30 or 40 minutes to answer an e-mail? Just try, even on vacation... to not participate in your firm's morning call. All of you have had to explain to your family that you'll try to catch up with them at lunch and you know it. Myself? I will admit to narrowing my book and going to higher levels of cash when I know I will not be truly focused. While I have less exposure over the time away, this actually increases my participation as I make exit and re-entry trades that I would not have otherwise made. Homo Sapiens? Those guys were awesome.
Deregulation in Banking
No net interest margin? No problem. Well, I would not go that far. On Tuesday, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency approved making some changes to the Volcker Rule (part of 2010's Dodd-Frank) that barred financial institutions, primarily banks, from trading speculatively with their own corporate funds. Compliance with the Volcker Rule has long been considered both complicated and expensive by the firms impacted. Proposed changes would be that mid-sized firms with a need to hedge agricultural or other business type loans on behalf of clientele will no longer have to prove that these trades comply with the rule. In addition, positions held for less than 60 days will not automatically be counted as proprietary. There will now be allowance in the case of larger banks to prove otherwise, even for shorter-term positions. Conversely, positions held for longer than 60 days, in particular for smaller banks, will automatically count as being compliant.
The Tuesday approvals do not change the rule. Not just yet. The Federal Reserve, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC), all still have to weigh in. Should all five concerned agencies agree, the changed rules would be implemented as of the new year, with impacted banks granted a year to adjust.
On Deck: Big Data
Splunk Inc (SPLK) will release the firm's second quarter financial performance after Wednesday's closing bell. If I described what this "Cloud King" does, the article would become quite lengthy. Suffice it to say that what the firm sells is a machine data platform based on an aggregation of other data derived from all kinds of activities, such as but not limited to financial transactions. The result is the use of what is generally known as "Big Data" to provide business intelligence to clients in need of identifying internal and external strengths, weaknesses, and security threats across an organization.
For the quarter, industry consensus is for EPS of $0.12. Whispers are running slightly to the high side. Revenue is expected to print at roughly $488 million. That revenue number would be good for year over year growth or 20.4%. That would indeed be good, except that over the past eight quarters, Splunk has enjoyed year over year revenue growth averaging 38.6%.
Interesting, I think, that of the 35 analysts that I can identify as covering SPLK, over the past three months, 28 have revised revenue expectations higher, while two have revised lower. Needless to say, I like Splunk. I have liked the stock for a good while, but I took my leave in late July, as the shares failed in the same spot, yet again. You see, these shares have developed a predictable pattern for most of the year. Let me show you.
Making some limited allowance for the June swoon, this is some basing pattern, don't you think. Unless one has traded the range, these shares have not performed for some time. Even with the rapid growth in both revenue and profit generation that this firm has enjoyed, the sideways period of consolidation still leaves the last sale at 54 times next 12 months' earnings. To my thinking, the 50 day SMA is an obvious hurdle. This spot has been recent resistance.
Long Butterfly Call Spread Trade Idea (minimal Lots)
The idea here for those who think the shares will rise to a point post earnings is to get long an at the money bull call spread, and short an out of the money bull call spread simultaneously, while using the same strike price for both spreads. Yes, the trade works in reverse with bear put spreads for those traders so inclined.
- Purchase one SPLK Aug 23 $127 call (value: $4.80)
- Sell two SPLK Aug 23 $132 call (value: $2.40)
- Purchase SPLK Aug 23 $137 call (value: $1.30)
- Net Debit: $1.30
Note: The trader in this example is paying for the $127 call through the sales of the $132 calls. The $137 call is purchased in an attempt to prevent disaster should the underlying shares greatly appreciate in response to earnings. Basically, the trader is spending $1.30 to try to make back $5. Max profit is derived at a share price of $132, and declines from there. Max loss is net debit.
Economics (All Times Eastern)
10:00 - Existing Home Sales (March): Expecting 5.4M, Last 5.27M SAAR.
10:30 - Oil Inventories (Weekly): Last +1.58M.
10:30 - Gasoline Stocks (Weekly): Last -1.412M.
The Fed (All Times Eastern)
14:00 - FOMC Minutes.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (LB) (.20), SPLK (.12)