All posts by Michael Comeau
Apple Earnings Preview: Is the Bad News Bad Enough?
Tech superheavyweight Apple (AAPL) reports earnings after the close today, and as always it’s the talk of the town for tech investors. Here is a quick summary of Wall Street’s consensus expectations: (data from Bloomberg and Factset) Sales: $42.0559B (Apple’s guidance was $42 billion) Earnings $1.386 per share Gross margin: 37.945% (guidance was 37.750%) iPhone units: ~40 million And for next quarter, analysts expect: Sales: $45.537B Earnings $1.593 per share Gross margin: 38.361% Now, let’s take a broader look at overall expectations for Apple. Right now, 82.7% of analysts rate it a buy. Let’s compare that to other major large-cap tech names: Facebook (FB): 88.0% rate it a buy Google (GOOGL): 90% Salesforce.com (CRM): 91.3% IBM (IBM): 25.9% Oracle (ORCL): 56.1% The average target price on Apple is now $121.91, down from $150+ last November. And for the full year, analysts now expect revenues of $215 billion, down from nearly $250 billion last fall. You can see the trend in this chart: (red is 2016 revenue expectations, white is stock price) So it’s safe to say that expectations have come down quite a bit. And perhaps most tellingly, yesterday, BGC analyst Collin Gillis downgraded the stock to a sell, saying “Our opinion [is] that Apple has peaked under the leadership of CEO Tim Cook.” That’s not as dramatic as the “Fire Tim Cook Era” which marked the last major Apple bottom: But it’s certainly in the same ballpark in terms of line of thinking. Remember, Apple is very cyclical at this point, and you want to buy when the news stinks. Therefore, I think the bulls have the edge with Apple here. Even if Apple misses, the downside may be limited because a decent amount of negativity is being priced in with the stock trading at 11 times earnings with a 2.2% dividend yield. (vs. a 10-year Treasury with a 1.56% yield) I’ll be back after the open with some possible options trades. (Click here for my trade idea)
Continue Reading -->The Safety Dance Starts, but You Can’t Argue With Price
The yen is rising this morning on what looks like an advance “sell the news” reaction in advance of the Bank of Japan Meeting on July 28-29. Remember, the yen has been ripping all year: Most economists expect the bank to increase its ETF purchase prices, cut rates, and increase its JGB purchases, which could mean it’s all but priced in. The Nikkei is off -1.4% and most European markets are red. SPX futures are flat, and I’m surprised they’re not down more. Crude oil slumped under $43 and the key biotech sector is getting roughed up in the early going. Gilead (GILD), which is 8.1% off the IBB ETF, is taking a big hit on its disappointing earnings reports, and is off 4.3% in the early going. IBB is indicated down -0.9%. That’s not the end of the world, but we can all agree that things are just plain better when biotech keeps its act together. There have been 4 horsemen leading equities since the 2/11 low — biotech (IBB), oil, high-yield (HYG), and the Russell 2000. Biotech and oil are obviously feeling the heat. High-yield is closely linked to oil (since oil prices drive default rates on energy bonds). Here is a chart of the HYG ETF vs. crude oil over the past year: So we have 3 of the 4 in some kind of trouble. Therefore, keep your eyes on the Russell. If that starts giving up, maybe the bears will score a victory. Post-Brexit, they haven’t been been able to do much. I still see an April-May-style sideways grind for the time being. Markets are a little stretched and sentiment is positive, but you can’t argue with price. Frankly, with the yen up so much and oil now 15%+ from the high , I expected SPX futures to be down at a least a half-percent. But they’re flat. In other earnings news, industrial giant United Technologies (UTX) is up after beating. The economic calendar picks up a little bit today, with S&P Case-Shiller, Markit PMI, Consumer Confidence, Richmond Fed, and New Home Sales numbers coming. However, the big news comes after the close with Apple’s (AAPL) earnings report. Expectations appear to be pretty low, but remember, it takes a lot of money to move Apple, so they really need to deliver. Twitter’s (TWTR) also reporting, and given how much that stock has run since Microsoft (MSFT) bought LinkedIn (LNKD), it will be in close focus. Still not fan of that one. Good luck friends!
Continue Reading -->T3’s Take 3: Hillary Clinton Derails Pokémon Go Hype Train
Want to Boost Your Trading Skills? Click here to sign up for one of our FREE trading webinars ******** By Michael Comeau 1) US Dollar Kills Commodities The US dollar extended its rally today as traders are once again pricing in US rate hikes this year. Just after the Brexit, Fed Funds futures implied a mere 9% chance of a December rate hike. Those odds are now back up to 48%. At the same time, traders believe the Bank of Japan and European Central Bank will add more stimulus, which would push major currencies down against the dollar. The dollar’s rise sent oil, gold, and silver lower. The drop in oil drove some equity market profit-taking, and the S&P 500 fell -0.3% to 2168.48, though the Nasdaq and Russell 2000 did slightly better. Biotechnology was strong ahead of Gilead’s (GILD) after earnings report, even though some analysts warned Gilead could miss expectations. And after a week of going nowhere, the VIX rose 8%, implying that traders are starting to price in some actual potential downside. 2) Will the Gold Trap Continue? T3 Live’s Jeff Cooper seems to think so. This is what he told Daily Market Report subscribers this morning: It’s a Monday and another golden hammer. Last Wednesday, gold and miners had a breakaway gap to the downside followed by a sharp rebound on Thursday when GDXJ backtested its overhead 20 day. Today’s gap down looks like the second cheese will get the mouse for those looking for a more pronounced pullback. See daily GDXJ here from June with 20 day. 3) The Nintendo Hype Train Gets Derailed Nintendo shares doubled in less than 2 weeks after the release of its incredible popular Pokémon Go game. However, Nintendo collapsed 17% today after the company admitted that the game would not produce meaningful revenues, even though the game is so popular that some tech experts believe it is impacting the use of social media apps like Twitter (TWTR). On July 15, I mused that Democratic Presidential candidate Hillary Clinton’s awkward Pokémon Go joke was a sign that the craze was getting out of hand. Incidentally, Nintendo shares topped out the next day, and it’s all been downhill from there: With the benefit of 20/20 hindsight, that looks like a perfect fad stock top!
Continue Reading -->Maybe the Brexit Didn’t Kill Planet Earth After All…
European stocks are up this morning after German’s Ifo’s business confidence reading came in better-than-expected, implying once again that Brexit-related fears have gone too far. As we’ve been noting on the Virtual Trading Floor again and again, global economic data has actually outperformed expectations since the Brexit. Below, you can see 2 charts showing the Citi economic surprise indices for Europe (first chart) and the US (second chart): In both cases, the trend is UP, not down. Plus this morning, Irish airline Ryanair kept its 2017 profit forecast in place even though presumably, the Brexit and recent string of terrorists attacks could impact air travel volume. And in fact, traders are once again pricing in Fed rate hikes this year. Fed funds futures now show a 45% implied probability of a rate hike this year, up from 9% after the Brexit. So faith in the economy is returning… whether that marks a near-term top remains to be seen. We’ve got some deal activity this morning. Yahoo (YHOO) is selling its main web properties to Verizon (VZ) for $4.8 billion. Yahoo will operate as a publicly-traded investment company with holdings in Alibaba (BABA) and Yahoo Japan. CEO Marissa Mayer says she will stay with Yahoo. AMC Entertainment (AMC) raised its bid for Carmike Cinemas (CKEC) by about 10% to $1.2 billion. SPX futures are as flat as an ironing board this morning. We are seeing minor profit-taking in commodiites, with oil, gold, and silver all off as US Treasury and Euro bond yields rise. The 10-year German bund is still negative though. Sentiment measures including CBOE equity put/call, VIX spreads, and the II survey still show that traders are in a pretty bullish mood, so the best past forward may be a little break that lets moving averages catch up, and lets the bears reload. I still think we’re heading for a summer stalemate that looks like the amazingly boring April-May stretched, and that’s ultimate a good scenario for the bulls. My main worry now is that crude oil just trades horribly. Crude was a major catalyst for equities off the February 11 low, and with oversupplly worries coming back to the forefront, it could just as easily serve as a downward catalyst. It would also be nice to see the Nasdaq and Russell 2000 confirm the SPX all-time high. But it’s very rare that markets behave cooperatively across the board, so keep your eyes on the important stuff. As long as biotech (IBB), high-yield (HYG), and the Russell don’t break down, equities will likely keep it together. And oh yeah — the Pokemon-driven Nintendo hype train just got derailed. The stock is down 18% today after investors that Nintendo’s clearly not going to make enough money from Pokemon to justify a doubling in the stock price.
Continue Reading -->All-Time Highs on the Table?
Happy Friday! We’re less than a day away from a much-needed weekend, so let’s try to go out strong… though I’ll settle for making it out alive. I’m picking Runaway Child, Running Wild by the Temptations as my morning pick-me-up since coffee wasn’t enough. Asian markets are slipping and Europe is slightly green following yesterday’s down day in the US. Japan is down on Governor Kuroda’s stated opposition to “helicopter money.” Markit’s euro area PMI hit an 18-month low at 52.7, while its UK PMI showed what they’re calling a “dramatic deterioration” in business activity. This is disappointing because UK economic data has actually been fairly strong relative to low expectations recently. On the plus side, Germany’s PMI was strong, though interestingly, the DAX is the worst performing major market this morning. Crude oil is off the lows but still down for the week as traders remain concerned about seasonably high gasoline inventory levels. In earnings, GE (GE) beat expectations despite a sluggish global macro picture, though fellow industrial Honeywell (HON) is off on light guidance. SPX futures are up fractionally on the boost from GE, so we could see the 7th new all-time high in the past 10 days. Sentiment continues to lean positive, which is probably best illustrated by the low VIX and steep VIX curve. However, bulls are not quite leaning “all in.” The ISE Sentiment Index has read bearish in 2 of the past 3 days and the AAII survey showed neutral sentiment. On my own personal back-of-the-envelope sentiment meter, I’d say that on a 1-10 scale, we’re at about a 7 out of 10 in terms of sentiment. (with 10 being ecstatically bullish) Near-term, the best course forward for the bulls seems to be a sideways grind like we saw in April-May. That horrendously boring lull tricked the bears into wasting all their money on put options, which ultimate provided the fuel for this recent streak of record highs. The economic calendar is more or less empty today — we’ve got just the Markit US Manufacturing PMI and Baker Hughes Rig Count, so odds are the news flow will be pretty light. I try to stear clear of politics here, but there is chatter that Democratic candidate Hillary Clinton will appoint a running mate today. If she happens to appoint Massachusetts Senator Elizabeth Warren (I see a less than 25% chance of this myself), the banks could get hit short-term. I wouldn’t mind seeing a modest down day today to digest gains Good luck out there friends.
Continue Reading -->T3’s Daily Recap Report: Earnings Are Blah, but This Bull Won’t Blink!
1) Earnings Season Rages On We walked into some big earnings reports today, and unfortunately, they were mostly bear-friendly: –Netflix (NFLX) issued very weak guidance, driving a -13.1% drop in this high-profile momentum name. -IBM (IBM) and Goldman Sachs (GS) beat expectations, but still couldn’t rally. –Rio Tinto (RIO) sank on weak demand for iron ore. –Johnson & Johnson (JNJ) and UnitedHealth (UNH) surpassed analysts’ estimates and staged modest rallies, but finished off morning highs. Coming into this earnings season, expectations were remarkably low, with analysts expecting the fifth straight year-over-year decline in earnings. And as it stands now, S&P 500 companies are not doing a very good job of vaulting over those lowered expectations. FactSet data shows that companies are reporting an earnings decline that’s basically in-line with the -5.5% consensus. So even though the bar is low, we’re not getting over it. 2) And the Reaction Many traders have been arguing that the investing public is very complacent. That was not true 2 weeks ago, but it certainly looks true today. CBOE put-call ratios, the ISE Sentiment Index, and various sentiment surveys all point to widespread bullish sentiment. Typically, markets top out when sentiment is very positive. However, let’s give this market some respect. The S&P 500 has barely budged in the face of geopolitical tensions, stretched charts, and the aforementioned weak earnings season. And with today’s -0.1% decline to 2163.78, it’s still within 0.2% of the all-time 2069.05 high set Friday! How could this be? Well, there are two elements at play. First, the Brexit is likely driving some buying of US equities, which are perceived as less risky. And second, US economic data has actually been quite strong over the past few months. This is a chart of the Citi US Economic Surprise Index, which measures economic data reports relative to expectations: The yellow line represents the S&P 500, and as you can see, it has been tracking economic data surprises pretty closely all year. 3) An Intel Options Idea Intel (INTC) is reporting earnings after the close tomorrow, and implied volatility on weekly options is incredibly high. This creates a good opportunity for a calendar spread, where you short expensive near-term options and go long cheaper long-term ones. Here’s a trade I’d look at: -Sell $36 call (this Friday’s expiration) for 30 cents (IV of 44%) -Buy $36 call (August 19 expiration) for 44 cents (IV of 20%) Debit of 14 cents per lot (give or take 2 cents). This is an extremely cheap way to play a flat or up reaction in Intel shares, and it could profit even if the stock drops modestly into earnings. The best case scenario is Intel closing at $35.99 on Friday. That would put the short call at 0, and the long call worth around 58 cents, assuming a drop in IV to 17%. That would be a 314% profit. Worst case is Intel drops big, which would wipe out the entire 13 cent debit.
Continue Reading -->T3’s Daily Recap Report: Mr. Market Is Still Flirting With Record Highs
1) Bears Get Grinded Out… Again! US markets managed to score a small victory today in the face of shaky European markets and geopolitical troubles in Turkey and other areas. The S&P 500 hit an intraday high of 2168.35, putting it less than one point away from making its sixth record high in as many days. The index rose just 0.2% on the day, though there were several signs of positivity below the surface, with traders taking what I’d call “selective risk-on” posture. We saw notable outperformance in biotechnology (XBI) and large-cap technology stocks, with Apple (AAPL) managing to crack the $100 mark for the first time since June 6. High-yield (HYG) was also strong despite a drop in oil prices. In recent months, high-yield and oil have been tightly correlated because of oil’s affect on high-yield energy bonds. Semiconductor stocks were also very strong after Softbank announced it would acquire chip designer Arm Holdings (ARMH) for $32 billion. However, with Netflix (NFLX) down huge this afternoon on its disappointing ugidance, we may see a turnaround in tech tomorrow. 2) A Step Back With the market well past the Brexit and flirting with all-time highs, let’s take a step back and look at how far we’ve come. So far in 2016, we’ve seen a major flip-flop. In 2015, the big winners were biotechnology (IBB) and select large-cap tech stocks, most notably the F.A.N.G. (FB, AMZN, NFLX, GOOGL) names, which rose an average of 77.5% last year. This year, the leaders have been what I call the G.U.T.S. complex — Gold (GLD), Utilities (XLU),Treasuries (TLT), and Silver (SLV). The G.U.T.S. trade is up 26.2% this year after falling -8.9% last year. Why the change? Simple — the Fed got dovish, other central banks are stimulus crazy, and fears of a global slowdown are everywhere. That’s given instruments that benefit from low rates a big boost. Taking a look at the broader indices, the S&P is up 6.1%, while the Nasdaq is lagging, primarily due to a huge drop in biotechnology. However, all US indices are significantly outperforming Europe. The Euro Stoxx 50 Index is down -9.7%, though to be fair, it’s nearly recovered its post-Brexit losses! 3) A Warning in the Russell 2000? This morning, Jeff Cooper of the Daily Market Report discussed the lagging action in the Russell 2000, which may be a hint of trouble to come: This morning’s report walks through another V Bottom by virtue of a Central Bank Slingshot following the Brexit Break, propelling a blow-off in the SPX and DJIA. However secondary, indices such as the RUT suggests risk is hiding out in the larger cap SPX. The same picture that has played out before past significant downdrafts. Moreover, a big SPX time/price square-out is on the table going into a potentially important low to high to high cycle with this week also being an important anniversary. Click here to learn more about Jeff’s Daily Market Report.
Continue Reading -->6th SPX Record High in a Row?
The market really feels like it’s out of gas, but lo and behold, the SPX is within a few point of hitting a new all-time high for the 6th day in a row. So let’s take a deep dive into the action and see if the bears are ready to take the lead. The action is a bit mixed below the surface, but the bulls appear to have a slight edge. Here’s where they’re winning: -The Nasdaq and Russell 2000 are outperforming. –Apple (AAPL) just cracked through $100 for the first time since late May. –Bank of America (BAC) is having a beautiful little grind up post-earnings. –HYG/JNK are green. -The VIX dropped back down. -XBI is RIPPING off morning lows which should scare the bears. -The yen is dropping again. But on the bear side: –Regional banks (KRE) can’t catch a bid. -Gilead (GILD) is getting no love despite a positive story in Barron’s -Crude oil is trading horribly, though the stocks aren’t doing as bad as you’d think. I’m really surprised HYG is green. -The CBOE equity put-call ratio is 0.72, indicating that traders are somewhat complacent.* -The ISE Sentiment Index is at 146, again indicating that traders are somewhat complacent.* *I use the “somewhat complacent” monicker because these measures are extremely volatile day-to-day. So the big 2 questions today are: 1) Will we get that elusive 6th straight all-time high in a row? 2) If we do get it, do we hold up? We’re less than 2 points away from going 6 for 6, so a big buy of Apple shares could put us over the top. And the yen weakness and biotech rebound are helping sentiment in a big way. But that’s where it gets tricky. The consensus thinking seems to be that we have to pull back since things feel so overheated, and sometimes, that means the move’s going to go on a little longer. Remember Mr. Market’s 2 rules: 1) Frustrate as many traders at any given time as possible. 2) Let trends run much further than most people think seems reasonable. So if the crowd thinks we go down, maybe we’ll just keep on going. I’m still watching biotech for confirmation of this move. And right now, XBI is saying we get that new record high. As for the aftermath, see if the biotechs hold or fold. Keep an eye out on the oil complex too. It’s not uncommon for oil to lead equity moves, and traders may start paying attention to crude’s big dip today. I think we go flat to slightly down within the next week. I’m thinking we get stuck in the the 2140-2180 range, and then maybe the lower end of the range pushes down to 2100 for some bounce-around action in the 2100-2180 area.
Continue Reading -->Morning Preview: Is the Sideways Grind Beginning?
The S&P 500 is coming off 5 all-time highs in 5 days, but we may be in for a sideways grind. On Friday, I wrote that the market was ‘feeling’ stretched but sentiment was mixed, which is typically a recipe for a whole lotta nothing in terms of action. I would not be surpised to see the market stay range-bound, similar to what we saw in the April-May snoozefest. Earnings are giving traders an excuse to take profits. We started off Q2 earnings season on high notes from Alcoa (AA) and JP Morgan, but we ended the week with unimpressive earnings numbers from names like Wells Fargo (WFC), Citigroup (C), and Swatch. I’d watch to see how Bank of America (BAC) gets treated this morning. It beat EPS estimates, but it’s up only fractionally in the early going. We also saw a miss an earnings this morning from transportation name JB Hunt (JBHT). European markets are down slightly today following the failed coup attempt in Turkey, though safety assets like gold, the yen, and US Treasuries are selling off. On the deal front, SoftBank of buying ARM Holdings (ARMH) for $32 billion, or a ARM is a chip designer that licenses its IP portfolio to virtually all mobile device makers. The SMH ETF is up about 1.4% in premarket trading. ARMH comprises 4.7% of SMH. ARMH is up 43% this morning, which is going to burn all the bears that sent its short interest to 6-year highs. SPX futures are modestly positive this morning, but well off pre-market highs. Again, how Bank of America gets treated will probably be a tell. We don’t have any market-moving economic data reports on tap. Now, even though I think the market’s likely to go sideways for a bit, I suspect we’re going to see a strong increase in the VIX within the next week or two. Remember what the VIX is — the market’s expectations of 30-day volatility, as measured by SPX options. And right now, the VIX curve is extremely steep and trading at a massive discount to realized volatility. These imply that traders are pricing in no movement. At the first bump in the road, even if the market ends up going nowhere, I suspect the VIX will rise sharply as traders reprice options more in-line with historical norms. This also means that options are cheap now — so if you’ve got a serious long or short directional bias, take a look at options instead of stocks. The game plan remains the same: watch biotech (IBB), oil, and high-yield (HYG) to measure risk appetites as they tend to be the tells. Good luck out there.
Continue Reading -->T3’s Take 3: Bulls go 5 for 5 in All-Time Highs, but the Picture Gets Muddy
1) 5 Days, 5 All-Time Highs For the fifth day in a row, the S&P 500 managed to make a new all-time high, something that hasn’t happened since 1998. The index hit a peak of 2169.05 just after the open before selling off to 2155.79, and closing down 0.1% at 2161.74. Earnings were a culprit. Traders were disappointed with Wells Fargo’s (WFC) numbers, which were held down from exposure to bad oil and gas loans. Fellow bank Citigroup (C) also lowered its margin growth forecasts. And European watch/luxury play Swatch reported a major decline in profit, extending the long streak of disappointing earnings numbers from consumer stocks. But from a bigger-picture perspective, the action feels like necessary digestion after the huge post-Brexit rally. 2) Kurt Capra on SPY This afternoon, my colleague Kurt provided the following analysis of SPY on the Virtual Trading Floor: Below is an hourly chart of SPY: Today it’s down, but right into support. If you look, the 60-minute trend has been the general of this move higher. There has not been a single break of key support throughout this move up. Today, the SPY is right into the gap fill area. So while the SPY is beginning to move down, we may see an attempt to move higher first and then form a lower high. The other possibility is that the SPY will gap under this support level and that will get price moving lower more quickly. 3) Nintendo Power! Shares of Nintendo Nintendo are up 93% in a week following the release of its blockbuster Pokemon Go app. It’s so big that Presidential candidates Donald Trump and Hillary Clinton are both using it as part of their campaign platforms. Ad agencies are racing to use it as a marketing platform. And it hasn’t even had a complete global launch yet! It’s generally not good practice to short parabolic moves, but the masochist in me wonders if Hillary Clinton’s particularly awkward Pokemon joke is a sign that this whole thing is getting out of hand. This is a chart of Nintendo (Japan shares): And here I show the chart of Nintendo ADRs (NTDOY): They went from trading less than 50K shares a day to millions/day in the past 4 days! Generally speaking, fads and crazes tend to go a little further than seems reasonable, so it’s usually better to short AFTER the trend breaks — not before.
Continue Reading -->