Islands in the Stream
Remember that little tune? Ready for a confusing twist? The song originally was written for Marvin Gaye by Barry, Robin and Maurice Gibb. So, a song that was written by the Bee Gees in an R&B style and was named for an Ernest Hemingway novel ended up being a country music (and mainstream) hit in 1983 from a Kenny Rogers album that featured this tune in a duet with Dolly Parton.
So why is this song running through the tortured cranium of the madman trader as he tapes on the foil for yet another day out on the fringe?
"Islands in the stream
That is what we are
No one in between"
More on that in a minute. Could be bullish? Could be. So would earnings growth. Well, can't have everything. Let's move on.
Expect Nothing, Except Everything
As we worked our way along the ledge, the very ledge we were walking on began to narrow. On our left, a rock wall, To our right... certain death. Enough to terrify anyone afraid of heights.
Go back now? That will add hours to our trip, and there's no certainty that I can get us back on our azimuth. Heck, we may already be well off course. GPS? Not for another 20-plus years. This is just us, a map, a compass, and 11 of 13 guys who probably have not yet figured out that we may be lost in the rain forest. Thank goodness for (nameless). He can read a map. He has a compass. He thinks I'm on course.
So, I lead across this narrow ledge as a show of confidence, conscious that in every rock crevice may be live snakes, scorpions or jungle birds that may not welcome us into their homes. At least the monkeys stayed below the canopy. They already freakin' hate us.
A cave? On the ledge? A respite from the stress of clinging to a wall? Turn the corner.... bats !! A thousand, no make that a billion. A billion bats turned the mouth of this cave into a one-way street, going the other way. Being startled was not an option, but in my head.... yes, this was the most surprised I have probably ever been. We moved on. We stayed on course.
Wednesday
The broader U.S. equity indices scored gains of roughly one-half of one percent on Wednesday. Bond traders sold off the long end of the Treasury curve, returning yield spreads to levels that pass for healthy in late 2019. The CBOE put/call ratio reverted to mean, or the 50-day simple moving average (SMA) of 0.98. You choose. Trading volume increased at the New York Stock Exchange as winners there beat losers by more than two to one, and advancing volume beat declining volume by more than three to one.
The market is not pricing in the macro. Yes, we know. The ADP Employment Report was a nasty gust of cold wind in the face. The ISM Manufacturing print has printed deep in the hole for four consecutive months. The ISM Non-Manufacturing index remains in a state of less-than -spectacular expansion (though young students should take note that this November weakness was born of a lack of orders currently in backlog; new orders are just fine.) The truth is that, with the Fed not really in play, the macro probably matters less. Investors already know that the Fed is padding the balance sheet out of necessity. That's all we need. Short-term rates are inconsequential at these levels unless long-term rates collapse.
Corporate performance is not being priced in. S&P 500 fourth-quarter earnings are expected to print -1.4% year over year. This means the current earnings recession will most likely extend to a fourth consecutive quarter of contraction.
The market keys off trade news right now. One day, the president suggests putting off a trade deal for a year. The next day, Bloomberg News reports that the two sides are hammering out a rollback of the current schedule of tariffs.
You know who pauses in that environment and waits for clarity? Human traders, that's who. You know who or what reacts to every news story on the drop of a dime? Keyword-reading algorithms. Then these sudden moves are exacerbated by other algorithms (we call them "bots") that feed off of momentum and race each other to the point of sale, to either hit a bid or take an offer in speed measured in microseconds, and then turn around and make the counter-transaction with the slightly slower bot at a tiny profit. That is called price discovery in 2019. Congratulations.
Now, You're Ready
About the opening paragraph. I want you to take a look at this:
OK, take a look at this:
Note that the Tuesday highs for both the S&P 500 and the Nasdaq Composite printed below the lows of these broadest indices on both Monday and Wednesday. Islands in the stream. A bullish reversal? Not yet. Though equity index futures are higher on Thursday morning, the gaps created this week must remain intact. Otherwise this week is just volatile, as if that is not enough.
Now, check this out:
The potential island is there for the small-caps, but not for the transports:
Looking at this chart made me wonder... among the Sector Select SPDR ETFs, what sectors were showing such separation and which were not? Don't worry, I am not going to throw 11 more charts at you, but the results might surprise you.
Though the energy sector ahead of the OPEC shindig easily led the marketplace on Wednesday, a potential island the Energy Select Sector SPDR (XLE) does not offer. Indeed, of the 11 candidates, only the (XLY) (Consumer Discretionary), the (XLK) (Information Technology) and the (XLI) (Industrials, despite the lack of participation by the transports) show this behavior. None of these sectors were leaders on Wednesday, but they are all groups heavily impacted by trade war news.
Digging just a little deeper in order to support that thesis, within the Tech sector, the double gap creating this one-day island is indeed there for the Philadelphia Semiconductor Index (SOX), but not so for the Dow Jones US Software Index (DJUSSW). Software as group actually closed lower for the day. Though this is generally positive, my thought is that ahead of Dec. 15 we may see a few of these isolated trading sessions, perhaps on both sides of performance and in both directions, leadership will come from these very same groups.
Shout out, by the way, to Real Money colleague Helene Meisler, who put the very idea of doing this little bit of homework in the back of my stinkin' head before I thought of it on my own.
Global Observations
Japanese equities rallied somewhat as the yen more or less stayed put in response to what seems like an underwhelming $121 billion fiscal stimulus package unveiled by the Abe administration. Actually, this is one of the largest in the post financial crisis era and the first such package since 2016, as well as the first under the reign of new Emperor Naruhito. Bear in mind that the Japanese government increased the consumption tax to 10% little more than a month ago.
Though this may all seem quite perverse, the thought of borrowing at negative interest rates in order to spur private-sector demand that can then be collected at 10% up front in addition to existing corporate and personal income taxes does make fiscal sense. They should probably be more aggressive in that environment, by the way, given the nation's problematic demographic development. Note to self: The U.S. is on the same demographic path. We either need to have more babies or import more talent.
As the Reserve Bank of India surprisingly left benchmark interest rates unchanged, the Sensex badly under-performed Asian equity markets overnight.
Just when you thought that Europe might be OK, German Factory Orders and Euro-Zone Retail Sales, both for October, did their best impression of a garbage truck rolling off of a cliff.
Crude oil prices are higher as we thought they might be as the cartel formerly and formally known as OPEC meets in Vienna here on Thursday, with the "plus" nations to meet as part of the group on Friday. At issue? The Saudis would like to show markets that they can still "stabilize" energy markets by impacting available supply. In other words, the Saudis would like to take the existing deal to curb production by 1.2 million barrels per day through March and raise it up to 1.6 million barrels per day and extend the new deal maybe through the end of 2020.
Of course, the Saudis are expected to announce pricing for the Aramco (ARMCO) initial public offering (IPO) this day as well. That pricing is expected to land in a range spanning from $1.6 trillion to $1.7 trillion. That would a record IPO valuation most likely to outlast Cy Young's MLB-record 511 victories. For the record, as of this moment Alibaba Group Holding (BABA) holds the IPO record of $25 bllion, set in 2014, while Justin Verlander leads active ballplayers with 225 wins assuming that C.C. Sabathia stays retired and Bartolo Colon doesn't ever show up again on an MLB roster.
Because You Asked
Well, some of you did, anyway. Yes, I am still long some Zuora Inc. (ZUO) .
For the record, I don't know how many other talking heads are willing to talk in December about a call made for the year in January that did not pan out, but heck, I'm not trying to sell you anything. I'm a market participant. Just like you. That thesis was based upon my expectations for growth in the cloud and for a faster-than-actual transition for the overall domestic economy from one of broad ownership of goods and services into one based upon subscription.
The thought there is that sellers would be drawn toward recurring revenues (this is reality) and that buyers (businesses as well as consumers) would be drawn by lower upfront expense (this has been slower, and slowed further by decreasing capital expenditures).
Zuora will report third-quarter financial performance on Thursday evening. Expectations are for a per-share loss of nine cents (six analysts follow the name, and all six have this number.) on revenue of $70.4 million. Realization of these estimates would present as year-over-year bottom-line growth of 10% on revenue growth of 14%. In my opinion, not bad given the problem with the sales force that had to be corrected on the fly.
As one can see, these shares have recently become reliant upon their own 50-day SMA for support. That line currently stands at $14.78. Even if there is an earnings-related pop, there is plenty of technical traffic up above the $17 level, where a 38.2% retracement of the 2019 selloff and the stock's 200-day SMA both live.
Keeping this position in the green all year has been an an exercise in risk management (and it was not in the green all year; indeed, it was at times quite negative.) I come into the day long 80% of my original intention for position size. That number had been above 200% at one point due to the marvels (and dangers) of dollar cost averaging. I have been short both calls and puts for most of the year, and remain short both at multiple levels.
That is how I manipulate net basis, and while shorting puts can get one in a jam, shorting call options only caps profit as long as one owns the underlying shares. As I worked my way from 200% exposure down to 80%, there were no losses taken. That was just strategic as I never intend to be long 200% of anything. The net basis for my current position is $14.60. I have increased equity exposure should the shares dip below $10 by January monthly expiration. Any profits are partially capped at the $16 level until December expiration in two weeks.
Economics (All Times Eastern)
08:30 - Balance of Trade (Weekly): Expecting $-49.7B, Last $-52.5B.
08:30 - Initial Jobless Claims (Weekly): Expecting 215K, Last 213K.
10:00 - Factory Orders (Oct): Expecting 0.1% m/m, Last -0.6% m/m.
10:30 - Natural Gas Inventories (Weekly): Last -28B cf.
The Fed (All Times Eastern)
10:00 - Speaker: Reserve Board Gov. Randal Quarles.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (DG) (1.38), (KR) (.49), (TIF) (.85)
After the Close: (COO) (3.27), (CRWD) (-.12), (DOCU) (.04), (OKTA) (-.12), (ULTA) (2.15), (ZM) (.03), (ZUO) (-.09)
