Working For The Weekend

The rally I have been looking for arrived a couple of weeks late but it has been a doozy. We should see a pullback next week as we are now overbought and seasonality will turn negative. Have a good night.

Frontrunning A Whale: Part Two

In the UK companies have to post every night how many shares they repurchase. According to Vodafone they have bought 157 million pounds worth of of their own stock since last Monday. The pace is about 100 million pounds a week. However there are only about 25 weeks left in the year. At this pace they will only purchase 2.7 billion pounds worth of shares by year end. They gave Deutsche Bank "irrevocable orders" to purchase 4 billion pounds worth of stock by year end. They will have to significantly pick up the pace in order to reach their goals.

Vodafone's share of Verizon Wireless' cash flow is as much as $5.5 billion a year, according to statements made by the CEO. This is not included in their cash flow statement but might be soon if Verizon starts paying dividends. That would give them a well into double digit free cash flow yield and they are aggressively returning cash to shareholders.

Please note: A correction to this post has been posted

The Most Amazing Thing

The most amazing thing about this eye popping rally is that investors are still not embracing it. There is still high put activity in the market, especially once one considers the magnitude of the recent rally.

CA Makes Bad Acquisition

CA Technologies, a company that trades at less than 8 times forward free cash flow, announced that they bought a cloud computing company for $330 million, or more than 8 times revenue. CA should use all its free cash flow to repurchase stock. CA could increase their EPS at an additional 11% a year by doing so, yet they continue to make dilutive acquisition.Their shareholder base are value investors and this is a slap in the face to them.

Their was a ray of sunshine in the CA press release as they have spent $150 million this quarter on share repurchases, which is a $600 million a year pace. I was hoping for more but it is an improvement over last year's $235 million in share repurchases. CA Inc. shares remain attractive but it is very frustrating to watch management waste money. An activist investor like Carl Icahn could do wonders for CA, by forcing management to return capital to shareholders rather than doing "pie in the sky" acquisitions.

Pros And Cons

My market view has become more muddled after the recent rally. There are good arguments for a move higher as well as arguments for a move lower. I will start by listing the bullish arguments.

Bull Case:

  • Intermediate term sentiment is still negative. After two months of declines market participants are underinvested .

  • The 10 and 30 day moving averages of the put/call ratios are still showing excess pessimism.

  • On an intermediate term basis the market remains oversold

  • Seasonality is positive for the next two days.

  • While the economy has slowed corporate profits have not been effected. Until corporate profits are hit its unlikely we will see more than a correction.

Bear Case:

  • The market is becoming overbought on a short term basis.

  • Seasonality will turn negative next week.

  • Some of the recent action might be quarter end markups.

  • The economy is slowing.

  • Commodity prices have barely pulled back and are gaining steam. Interest rates are on the rise again.

  • Austerity measures will hurt the economy in the short term.

  • Eventually corporate profits will suffer.

  • No mo POMO starting tomorrow. QE II ends today.

In the very short term the bear case is slightly more convincing, especially if we rally today and tomorrow. However, a pullback is likely to be shallow as the bulls have a better intermediate term case. To confuse matters even more I believe the bears have a better long term argument.

Mixed Feelings

On a short term basis the market is starting to get ahead of itself. However, on an intermediate term basis sentiment is still pretty negative. Its unlikely that all those bears from a week ago are already fully invested. It never ceases to amaze me how they always get bullish at higher prices and bearish at lower prices. Have a good night.


My overall opinion on the market at this point is neutral. I sold some covered calls and am lightly hedged but I am still net long. This is more a function of the fact that I like my positions. If the market rallies through Friday than I will get more defensive.

Too Easy

People who tried to fade the Greek news today are suffering some pain. There are a number of reasons that I believe this trade did not work out:

  • Too many people were trying to fade the news because it worked last week after the confidence vote. It was a crowded trade.

  • The setup was different than last week because there was little exuberance heading into the vote today, whereas there was extreme call buying heading into last week's vote.

  • Seasonality is now positive.

  • It is the end of the quarter. With the sovereign issues out of the way for now, markups are more likely.

Too Much, Too Fast

Greece passed the austerity measures and stock futures are pointing to a gap up. I would not chase this move but if the move is faded hard I believe it could be bought. My best guess is that we chop around today without a huge move in either direction. I don't have a strong feeling about the market at this point.

Remaining Positive

While I have been reducing my long exposure as a matter of discipline I am maintaining my positive bias for the balance of the week. I am not seeing the type of over exuberance we saw going into the vote of confidence, seasonality is positive and we are not overbought yet. Have a good night.

Rotation:Part Two

Last week I noted that we finally saw money starting to rotate out of consumer staples and into technology. This rotation has continued nearly non-stop since. I believe it has now gone too far. I expect consumer staples to perform better going forward.


I am doing a little selling here after the nice run we had.

Sitting On My Hands

I am doing little today as we await news from the Greek Parliament. As long as the austerity measures pass my inclination would be to fade a big reaction either way.

Repeating The Case For CA Inc.

CA Inc. is the type of stock I have done very well with in the past. It is a steady business with a cheap valuation where the company is beginning to return capital to shareholders.

CA Inc. is a software and services provider. Most of CA's business is through long term contracts of approximately 3.5 years. This makes their business steadier than most other technology companies. Business held up remarkably well during the Great Recession. The stock trades at less than 8 times forward free cash flow to enterprise value. A market multiple would lead to 50% upside in the stock.

Investors are fed up with CA as it has gone nowhere for over a decade. CA Inc. had been using free cash to pay down debt but is now sitting on a large net cash position. They have begun returning cash to shareholders via a more aggressive repurchase plan. I believe this will be the catalyst to finally spur the shares higher.

The Facts And My Opinion

Here is how the indicators are lining up:

  • The market is no longer oversold although it is not yet overbought either.

  • Seasonality is positive through the end of this week and then turns slightly negative next week.

  • Sentiment surveys are not showing extreme bearishness, but are showing too much bearishness.

  • The put/call ratios have been showing a lot of activity in puts, except for a few scattered days of call buying.

  • Rydex traders have backed off their bullish bets but have not increased bearish bets to a large degree.

It is disappointing that the bulls have been able to do so little with the oversold reading they had. That said, I am still inclined to give the bulls the benefit of the doubt for the balance of this week. Seasonality is strong, there is too much bearishness and we are not yet overbought.



The Good News First

The good news is that we are not seeing the type of exuberance today that we saw going into the Greek vote of confidence last week. That means that if the austerity measures pass we are unlikely to see the type of violent "sell the news" reaction we saw last week.

The bad news is that the Greek parliament still needs to pass the austerity measures in order for us to reach that point. If we do get a "sell the news" reaction I believe it could be bought. If  Greece does not pass the austerity measures all bets are off. Have a good night.

Wrote Calls

I wrote covered calls against my entire Microsoft position. I caught a 5% move in the name while the market has gone lower. I want to lock in some gains.

CVS Is Attractive

After a nice run since March, shares of CVS have performed very poorly recently. I sold my position in May but have been writing naked Puts in the past few weeks in order to re-establish a position. I believe the shares are becoming quite attractive again.

They trade at less than 12 times 2012 earnings. While better multiples can be found, they trade very cheap given that they are in such a steady business. They have demographic tailwinds as baby boomers age and use more medicines. Additionally, they make more money on generic drugs and hence will profit in the next few years as a wave of blockbuster drugs go generic. The company is aggressively repurchasing shares. I believe the recent weakness in the shares is an opportunity.

You Are Here

While seasonality is slightly negative today it turns very positive tomorrow and remains that way for the balance of the week. The chart below is from CXO Advisory Group. I highlighted with an arrow where we are.

As long as the Greek vote goes as expected and austerity measures are approved, I believe the odds favor the bulls this week. We have negative investor sentiment coupled with very positive seasonality. This combination argues for some mean reversion.

What A Waste

The bulls have squandered this oversold reading thus far. The market has basically just chopped around since we became maximum oversold. The bulls still have some time left but eventually we will no longer be oversold. I am going to give the bulls a few more days. Have a great weekend.

Europe Is Closed

Europe was not soothed by the the agreement between the EU and Greece. The good news is that European markets are finally closed so its likely we will have  a calmer market for the balance of the day. I am hoping for a real snoozefest as I have been waking up at 4 AM all week.

Flip Flop

Investors seem to be flip flopping from extremely bullish to extremely bearish and back on a dime. Bulls could have made money buying weakness while bears could have made money selling strength. Those chasing breakouts and breakdowns have been getting tossed around.

I prefer buying weakness as long as the market remains oversold. Seasonality will turn positive on Tuesday and remain that way for the balance of next week. This is not an easy market to trade but there are opportunities for the nimble.


The fact that the EU reached an agreement with Greece on an austerity plan was a surprise to nobody. There was a lot of put buying this morning and it seems the bears were caught offsides. The announcement of an agreement sparked the fire. Have a good night.


For months on end we have seen a rotation out of technology and into consumer staples and other defensive sectors. Today, we are seeing technology leading and staples lagging. That is quite unusual for a big down day. This is a small incremental positive.

Polar Opposite

At midday yesterday I noted that the call buying was getting out of hand. Today, we are seeing the polar opposite with put buying once again off the charts. This is an improvement.



The Bulls

The S&P futures are currently trading over 10 points below fair value. I was not expecting this deep of a pullback but still believe that the bulls deserve the benefit of the doubt in the coming days.

My reasoning for a near term bullish outlook has not changed. The very negative sentiment towards equities and the oversold condition of the market should buoy the markets. Seasonality is still negative but the most negative part of the seasonality has passed and will soon turn positive.

In my portfolio I have been sticking to companies that are cheap, have less economic sensitivity than average and are actively repurchasing their own shares. This tactic has started working very well in the past week. Over the course of the Summer animal spirits will likely remain subdued. Holding value names where companies are aggressively buying their own stock will likely continue to outperform under these conditions.


We indeed had a shakeout after Bernanke quashed hopes of QE III anytime soon. This should not come as a surprise after a strong run. I believe the market will find its footing soon and don't believe the rally is over. Have a good night.

Market May Need A Breather

The put/call ratios have done an about face and shifted to heavy call buying. In addition, the market has made quite a run from the lows. It would not be surprising to see some sort of a shakeout. That said, I don't expect a dip would go very far and don't believe we have seen the highs for this rally.

The Independence Day Rally

Few were positioned properly for yesterday's rally as bearish sentiment has spread in recent weeks.  I believe that the under invested will provide a bid to the market on pullbacks. The market will likely rally into Fourth of July weekend as we are oversold and sentiment is too bearish.

The sentiment surveys, oversold readings and the put/call ratios all point to levels of negative sentiment that have typically led to rallies. One day of rallying does not relieve the bearishness that has been built up over the course of seven weeks. The reason I believe we will rally into Fourth of July weekend is because we will not be overbought until that point. Additionally,  turn of the month seasonality is typically positive, which works out to the days leading into Fourth of July weekend.

Cautiously Optimistic

The market has managed to climb higher despite the very negative sentiment that has yet to lift. As long as sentiment is this negative and the market is oversold I am inclined to keep my positive bias. My biggest concern is the situation in the EU.  The possibility of a default,even if it is an outside chance, has kept me from getting as aggressively long as I would have liked to be.

Putting Europe aside, the biggest obstacles right now seem to be Apple and poor seasonality. Apple is a widely owned stock and it likely is not giving investors warm and fuzzy feelings about the stock market. The good news is that it seems Apple is in the purging stage as it has broken many obvious technical levels. Seasonality continues to be negative but will turn positive next week.

I will be in a conference today so posts will be sparse.

Apple Bottom

It is difficult for the market to rally when the most important stock, Apple, goes down everyday. I believe the market is trying to put in a bottom and will leave you with the wise words of Jeff Saut:
Accordingly, I continue to think the equity markets are in the process of making a “low.” As stated, “The only question to me, at least in the near term, is if we get a selling climax or a selling dry up?!” The ideal pattern would be for some kind of “pornographic plunge” hour into the 1230 – 1250 zone, but given last week’s action, a “selling dry up” (where the sellers just run out of steam) can’t be ruled out.

Have a good night.

Frontrunning A Whale

I am not going to restate the entire case for Vodafone as David Einhorn has done a better job than I could hope to do. In short, Vodafone is not being given credit for its 45% stake in Verizon Wireless. If they trade in line with the valuation of their peers the stock should have greater than 50% upside.

The case for Vodafone has been valid for a long time but what has changed is that there now is a catalyst for the shares to go higher. Vodadfone announced the details of their greater than $6 billion share repurchase plan. They have structured it similarly to an accelerated repurchase plan in that they cannot back out, and will complete the plan by the end of the year. From Vodafone:
On 17 June 2011 Vodafone gave irrevocable instructions to Deutsche Bank AG London ... to purchase Vodafone shares on Vodafone's behalf during the period from 20 June 2011 until 30 December 2011 (the "Period").   The purchase of shares in the Period pursuant to the irrevocable instructions and the £4bn share buyback programme will be executed at all times ...

Using average volume and the current price this would mean that they will be buying well over 15% of the daily volume of the stock on the LSE between now and year end in order to complete the repurchase.


Please note: A correction to this post has been posted

Getting Constructive

Sentiment is at a bearish extreme. A bevy of indicators are showing that investors are as pessimistic as they have been at other good buy points. I posted a chart showing how poor seasonality has been following June expiration. If this leads to more downside I believe a very good buy point is shaping up.

From a valuation perspective the market does not seem like a bargain. However, I have recently found individual stocks that are good values even if we are heading into a recession. At the beginning of the year healthcare and biotech were a steal as investors dumped the sector wholesale to be in economically sensitive stocks. I believe the same type of indiscriminate selling has produced a new set of bargains. I have bullish positions in VOD, CA, MSFT and CVS.

Weak Seasonality

I have noted that seasonality is weak for the days after June expiration. Here is a chart from CXO Advisory Group:

Seasonality is but one piece of the puzzle.

What A Week

Believe it or not, the S&P 500 is flattish on the week. We have extreme pessimism and have seen bouts of panic with the VIX spiking. It is not difficult to make a case for a bottom.

The bears have a case for further downside as well.  The day after expiration tends to be weak as does the entire week after June expiration. Additionally, if this is indeed a selling stampede today was day 13. Selling stampedes tend to last 17-25 sessions according to Jeff Saut. I believe the long side will be rewarded from these levels but there might be a little more downside first. Have a great weekend.

Momentum Tech Wreck

  • Momentum technology names are lagging once again. Apple and Google are lower with the S&P 500 up 10 points.

  • Google looks extremely attractive to me from a valuation standpoint. They, like Apple, return no cash to shareholders.

  • If Google falls much further I will have little choice but to buy. I believe they will at some point return cash to shareholders. A share repurchase was under discussion last Summer but then the stock took off.

  • The week after June expiration is typically weak.

  • The extreme negative sentiment and oversold reading are supportive of the market.

  • The NAIIM Survey of Manager Sentiment Active money managers shows managers with nearly the lowest exposure they have had since the bull market began. This has led to rallies in every other instance.


Was that "The Whoosh" lower or just "A Whoosh" lower? Is this just a bounce in a selling stampede or is the selling stampede framework not valid? A good case can be made both ways. We saw some decent panic at the lows today. One would think that those lows should hold for at least a day. Have a good night.


Low Versus High Fliers

The high fliers in technology like AAPL, NFLX, CRM and OPEN are imploding, while never do wells like HPQ, MSFT and CSCO are higher on the day. Its possible that a long/short trade has gone awry.

Market Participants

VIX Not Budging

Despite the fat that the market is higher the VIX is not budging. Do any readers have an opinion on the implications?

A Common Theme

There is a common theme to every stock I own. The valuation is cheap and management is returning cash to shareholders. I am avoiding stocks like Apple where management hoardes cash. I have bullish positions in CVS, VOD, MSFT and CA. All are repurchasing shares.

An Oldie But A Goodie

I have bought shares of Vodafone. I believe the stock has 50% upside as its stake in 45% stake in Verizon Wireless is not reflected in the stock price. Vodafone is commencing a $6 billion share repurchase plan. That might be the catalyst to get the shares going.

Is Paulson Toast

A Wall Street Journal article yesterday noted that John Paulson's flagship fund was down approximately 20% for the year. In a market that is flattish for the year those are the type of numbers that lead to redemptions. Paulson's funds under management were as high as $38 billion. There is no room for error with those types of numbers.

Selling Stampede

According to Jeff Saut a selling stampede is when the market sees constant selling with only 1-3 session counter-trend rallies. A typical selling stampede lasts 17-25 sessions. Even during the financial crisis this framework seemed to work well, except for a single instance where a selling stampede lasted over 30 days in late 08'.

If we are currently in the midst of  a selling stampede today is session 12. It has been a long time since I dusted off this framework as it typically occurs during times of crisis.

The Big Apple

Apple does not pay a dividend and does not repurchase any shares. The market cap of the company is greater than $300 billion. Exxon Mobil is the only company whose market cap exceeds Apple's. Exxon both repurchases shares and pays a dividend to help support the market cap. Apple's shareholders are left to do the heavy lifting on their own.

Not only does Apple not repurchase shares but they issue shares to employees through stock options. Apple's share count has increased by 15 million shares in the past year or $4.5 billion. Assuming this rate of share growth, the stock needs inflows of $4.5 billion a year just to keep the share price steady at current prices.

It has been easy to recruit new shareholders until now as Apple's popularity has grown wildly as has the share price. But the law of large numbers seems to be having an effect and if the stock stumbles it might make that job harder. The valuation and fundamentals of Apple seem solid but share price growth will be a challenge with management's current capital allocation strategy.


Tail Between My Legs

I have long thought Greece to be an important issue. While Greece is small, the European banking system is thinly capitalized. On  a mark to market basis the entire European banking system is likely insolvent.  If Greece defaults losses would have to be taken and the dominoes would start to fall. Eventually, the powers that be would step in but there would likely be some pain before we reach that point.

I thought we could avoid the European debt issue for this week  as not much was on the schedule in Europe for this week. Unfortunately the market chooses the point of recognition for an issue and that could be at any time.

Barring contagion from Greece the market should rally as we can now add panic to the mix of positives. Unfortunately, we cannot rule out contagion. I am not willing to take that risk, except with stocks that I believe to be cheap enough to hold through a recession. That is the reason I sold my trading longs, but held onto my core longs. Have a good night.

Exited QQQ

I puked up my trading longs. Holding my core longs CA, MSFT and CVS. Time for the market to rally.


My trading long has been through short SPY Puts. I have moved the exposure to long QQQ. The reason I did this is threefold:

  • I lowered my notional long exposure in case of a disaster.

  • I believe technology is poised for the largest rebound as it is the most oversold.

  • If there is contagion due to a Greek default or fear of a contagion, tech companies are relatively well positioned as most do not require access to debt markets.

Cisco Is Getting Interesting

Cisco is starting to look interesting. Ex-cash the company trades at around $10 and analysts estimate they will earn $1.60 this year. I look at the number including stock options expense, which is $1.30. I believe handing out stock options is an expense that should be considered in one's valuation analysis.

Cisco is facing competitive pressures in what used to be a virtual monopoly and earnings are at risk. Even if earnings fall by 30% the stock still looks cheap, giving it a decent margin of safety. I am planning to do more work on this one.

Extreme Put Buying

Its early, but we have seen extreme put buying thus far. Market bending but not breaking. Will the bears get caught offsides?

Not Giving Up On The Bulls

A Greek default is looking more likely as the EU cannot agree on a package and the Greeks reject austerity. It is unlikely that any concrete resolution or default will occur in the coming days, giving the market some breathing room to rally in the near term.

The market now has  a good oversold reading, the put/call ratio is oversold and sentiment is negative. The bulls in the Investor's Intelligence survey have fallen further to 37%, a reading which typically is positive for the market. The Investors Intelligence survey tends to reflect professional sentiment. The professionals have finally joined individuals in being negative on the market. The NAAIM, Hulbert and ISI surveys confirm this negativity.

With such widespread negativity and the market oversold I continue to give the bulls the benefit of the doubt. I will reassess my short term outlook at the end of this week as the oversold reading starts to wear off  and we head into a typically seasonally negative week. The week after June expiration has a negative seasonal bias.

Nasty Close

The market had  a nasty late day fade that was eerily reminiscent of last Thursday. We all know what happened on Friday. As I wrote earlier I believe we are in a different situation this time around. We now have  a good oversold reading. I believe the bulls deserve the benefit of the doubt for the next few days. Have a good night.

Day One

Today is the first day of the rally and the market has a decent oversold reading. Anything can happen in markets and this could be a one day wonder. However, the odds don't support that outcome. It would be quite unusual for such  a strong oversold reading not to matter and fo the market to just fall apart.

We have had a lot of one day wonders recently. It is tempting to draw on recent experience but there is an important distinction between those instances and the current one. The market was not yet oversold until now, except on an extremely short term basis. In addition sentiment has become more extreme as well. All this is supportive of the market.

Bulls Turn

The window for the bears to push this market lower is closing quickly, as the market will be maximum oversold at the end of the day today if we head lower. The S&P futures are nine points higher and my guess is that we have already seen the lows and a rally has commenced.

The oversold reading will last through the end of next week. Even if this market is weak I would expect the rally to last through the end of this week at minimum and through next week if all goes well. I believe we will get a retest of these lows at some point but now its time to concentrate on the rally.

Close Enough

We are one day away from being maximum oversold. In my experience, buying a maximum oversold market is a very good risk/reward trade. This decline is getting long in the tooth and the long side is far more attractive to me than the short side. Have a good night.

Added To CA Inc.

I have been adding to my position in CA Inc.. My highest success rate has been in cheap companies that have suddenly become aggressive about buying back shares. CA Inc. trades at less than 8 times forward free cash flow to enterprise value, so it certainly meets the cheap definition. They have been using free cash flow the past few years to pay down debt and now have $1.5 billion in net cash. They are now moving to repurchase shares more aggressively.

The Time Is Now For The Bears

The bears best chance for more downside is today or tomorrow. As I wrote earlier we will be maximum oversold at the end of the day tomorrow. Some oversold measures will will trigger at the end of the day today.

Bough Back GS Puts

I bought back the GS puts I was short. There is little need to leave cheapie Puts hanging around.

Turn Baby Turn

  • Demark indicators are calling for a rally starting tomorrow. I don't follow Demark but people like Steve Cohen do.

  • Today's Wall Street Journal Ahead of The Tape article was advising investors to play defense. Thanks for the scoop after six straight down weeks.

  • It strikes me that so many people are recommending selling tech stocks because the economy is slowing. Double digit free cash flow yields in stocks like Microsoft and CA Inc. make them priced for a depression. I am long both names.

  • I came into the year loaded up on healthcare names trading at double digit free cash flow yields. At the time nobody wanted healthcare because the economy was growing. They have been the best performing group.

  • My pet peeve is fundamental arguments that ignore valuations.

Investing Is Not A Science

Everybody seems to be fixated on the fact that the VIX has not spiked. I cannot recall ever hearing so much chatter about the subject. I would prefer it if the VIX spiked but it is not necessary for that to happen in order for us to see a bottom.

I have rarely seen a bottom where every indicator was pointing to a bottom. At most good bottoms the majority of indicators are pointing to a bottom. However, one can usually find some indicators that are not at an extreme. The stock market is not a precise science and one must weigh the evidence.

Aside from the VIX there are some other indicators that are not lining up for a bottom. The Investors Intelligence bears are still very low, even though the bulls have pulled back significantly. At Rydex we see a similar situation where the number of bullish bets has shrunk but the bearish bets have not picked up.

The list of indicators pointing to some sort of a bottom is significantly larger than those not pointing to a bottom:

  • The market will be maximum oversold by the close of trading on Tuesday.

  • The market will be oversold on an intermediate term basis at the close today.

  • The put/call ratios are showing extreme bearishness.

  • The AAII survey is at an extreme consistent with bottoms.

  • Hulbert sentiment is at a similar extreme.

  • We are seeing TICK readings consistent with bottoms.

There are plenty of indicators pointing to a bottom but the fact that everybody is fixated on the one that is not is telling. I would be more concerned if everybody was focused on the bullish indicators. I expect to see a turn by the middle of this week.




Easier Said Than Done

I believe that curent buys will be rewarded once the market turns. From a time perspective I believe we are close to a bottom. Both sentiment and oversold are starting to line up for the market. The last bit of a decline is usually the most gut wrenching and buying into that type of action is easier said than done but generally rewarding. Have a great weekend.

Extreme Put Buying

The CBOE equity only is above 1.00 again. Every put/call ratio is showing extreme put buying. If today were not Friday I would be loading up. I would not be surprised if we staged a rally between now and the end of the day. Either way we are setting up for a better rally. This feels a lot more like the end of a  decline than the beginning.

Towel Tossing

Whereas we were seeing quite a bit of bottom fishing in the last week, I believe we are seeing towel tossing today. The last bit of a decline can be the most stomach churning but I believe this is capitulatory action.

I Want To Like Google

I have little doubt that Google is worth $600 under very conservative valuations. The problem is that it sports a $166 billion market cap and does not return any cash to shareholders. Not only do they not return any cash to shareholders but they give out stock options, which means new stock is sold into the market each year. The founders are constantly selling shares as well. It requires an inflow of new money just to absorb the new stock.

We are reaching ludicrous valuation levels but it will be difficult for the shares to rally without a repurchase plan. Their was discussion of a repurchase plan a year ago and I believe we will see a lot of pressure on the company to return cash if the shares dip much further. The founders behave as if they are the sole owners of the company and are ignoring the shareholders. Google needs to start returning cash to shareholders yesterday.

Adjusted MSFT

I was short Microsoft 24 Puts expiring next week. I switched to a long stock position. This is a more aggressive position.

Good News For Large Caps

While I believe large caps trade at more attractive valuations than small caps, I have not thought it a good idea to make a large over small cap bet. The reason being that the government was planning to sell their stake in AIG, Ally and GM. A few months ago they were hoping to raise $50 billion from the sale of all of these stakes. I thought $50 billion in new supply for the large cap market would be a lot to digest.

The AIG offering has passed and they did not sell nearly as much as they hoped. The Ally IPO was pulled and now the government might not sell their stake in GM as the price is too low. This might give the large cap market some breathing room. On a long term basis I believe large caps should outperform and the short term outlook is looking a lot better as well.

Chop, Chop

The market tried to rally and has tried to head lower but is basically back where it was on Monday as we chopped around all week. After plunging 60 points in 4 days the S&P 500 has alleviated the very short term oversold condition by going sideways. In addition,  the debt markets have worsened and the VIX is still showing complacency. That is the bad news.

The good news is:

  • If the market heads lower over  the next few days we will get a better oversold reading. One that should lead to a better rally.

  • The AAII survey has reached an extreme that typically leads to a rally. The bulls are at a lowly 24% while the bears are at 48%.

  • The Investors Intelligence bulls fell to levels that typically lead to rallies although the bears are still way too low at 22.6%.

  • We have seen extreme put buying. The CBOE put/call ratio has been over 1.00 for 7 days in a row. The CBOE equity only hit .99 on Wednesday. That level has not been seen in years.

  • Hulbert sentiment is extreme and arguing for a rally.

  • Rydex traders are positioned in a neutral posture. This is an improvement as they have been excessively bullish all year.

A move lower over the next few days would get the market fully oversold and likely bring out even more bearishness.  If that were to occur I would  shift my short Put positions into outright longs. If the market continues to chop around it will be a tougher call. Either way, I believe it is late in the game for the bears. I believe there will be a better entry point for the bears and am partial to the long side.

Day 5

Today was day 5 of the decline. Unfortunately, we do not get a good oversold reading until a decline is about 10 trading days old. A good oversold reading generally leads to a longer lasting rally.

It is fairly uncommon not to see some sort of relief rally during that 10 day period when the market becomes oversold. Generally, there is a multi day move lower, followed by a brief relief rally, followed by a second multi day move lower.

Thus far we have not seen the relief rally I have been looking for. The main culprit appears to be the liquidations in Chinese companies, financials and select momentum names. I remain of the belief that we should see some sort of a relief rally or at least chop sideways for a couple of more days. Have a good night.

The Not So Snappy Snapback Rally

Thus far the rally has been less spirited than what I anticipated. There is a reason they call it a "snapback" rally, but that reason is not apparent today. I believe there are two main reasons for the lethargic action. The first is that there are signs of liquidations happening in certain sectors and the second is investors seem to be fighting this rally.

Chinese stocks have completely imploded. At first it was the second and third tier names but SINA and BIDU have recently fallen out of bed as well. This has carried to other momentum names as well that are not even Chinese but have similar growth ownership. The financials have also been under severe pressure, although they do seem to be stabilizing. I believe these liquidations will make it hard for the rally to carry very far.

We are once again seeing put activity and there seems to be a general distrust for this market. I believe this is a positive for the market in the near term as these counter trend rallies generally tend to end once they are embraced.

All in all I believe  that this rally likely has further to go but that it won't be up, up and away.

Long SPY

I have taken a trading long in the SPY on this pullback.

Ready To Rally

We are now nearly 60 points lower on the S&P 500 in four trading days. We have seen extreme breadth readings and extreme put buying. The Hulbert HSNSI short term market timers are now recommending a net short position in the Nasdaq. In the past this has been an excellent contrary indicator.

Anecdotally, it seems everybody out there is bearish and the numbers are starting to back that notion up. All this strongly argues for some sort of relief rally that should last one to three days.

Hedge Fund Hell

Hedge fund names were crushed today. John Paulson's top 3 equity holding were down 4% on average today. It seems we are back in a "risk off" world. Last Summer some amazing bargains were created by the "risk off" movement and that might be the case again this year. I have been nibbling on individual names that have become cheap.

The market as a whole is still not at an extreme although the rubber band is getting stretched very far on the downside in the short term and we really should see some sort of a bounce soon. Have  a good night.

Wrote CVS Puts

I wrote the June 37 CVS Puts.

Void Of Emotion

  • This market feels completely void of emotion. The market has had a mini crash in the past few days and at the lows today the VIX was barely rallying. It is now lower on the day.

  • There seems to be a lot of put activity again today, which makes the previous bullet point even stranger.

  • The bottom seems to be completely falling out of Bank of America and Citigroup. What happened to them normalized earnings?

  • Paulson really cant catch a break with Bank of America and Citigroup making up nearly 25% of his equity holdings.

  • iCloud=height of stupidity

  • If cloud computing weren't the buzzword of the day Apple's online media storage, aka iCloud, would barely deserve a press release. Apple earns $20 billion a year. This is not moving the needle.

Sold MSFT Puts

I have sold additional MSFT 24 Puts expiring in two weeks. Microsoft will be a meaningful position for me if we are below 24 at June expiration.

The Outlook

I have written numerous times that I don't expect this Summer to be great for the bulls. I believe the best they could hope for is a trading range. However, that does not mean that there will not be rallies. I believe that we are setting up for such a rally at the present.

The S&P 500 is sitting 50 points lower than where it was at the close of business last Tuesday. Since then we have seen two very nasty days of breadth and extreme put activity. This typically leads to at least a bounce.

Unfortunately we are not set up for a bigger rally. If we rally through Wednesday the market will once again be overbought. Sentiment indicators have not reached extremes either. I believe there will be opportunities this Summer where sentiment indicators register extreme readings.

I am largely in cash but short puts as well. I want to clarify to readers what being short puts means about my market outlook. If sentiment were extreme and we were oversold I would be long stock. Short puts is a far less bullish posture than long stock. For instance, my largest position is that I am short the SPY 128 Puts expiring in two weeks. Essentially what I am doing is committing to going long the S&P 500 at 1270 (including premiums) in two weeks if we keep plunging. For that commitment I receive premium, which I get to keep even if we don't fall by that much. Saying that I will be willing to go long if we fall another 30 points in the short span of two weeks is not that bullish.

Blood In The Water

Hedge funds as a group are not having a good year. Hedge Fund Research's HFRX Global Hedge Fund Index was down .97% through May 30. It likely has not gotten better as the market has fallen since. The recent Chinese frauds have hit  a large number of high profile hedge funds hard. The FT reported that John Paulson is down 13% in his flagship fund year to date.  The risk is that we see a repeat of last Summer where the buzzword among  hedge funds becomes "risk off".

Hedge funds have very little tolerance for pain these days.  Most have "risk management" systems in place where they very quickly reduce risk when they start losing money. Last Summer it became a self fulfilling cycle as hedge funds sold, sending risk assets lower forcing other hedge funds to sell as well.

The good news is that hedge funds have been seeing heavy inflows this year. This additional cash likely lessens the need for selling. However, hedge funds as a group are more likely to be a drag on the market for the remainder of the Summer.

Where Are The Bulls

The S&P 500 is now down nearly 50 points in three days and there is not a bull to be found. Even if we are to head lower this Summer it will not be  a straight down affair and there will be bounces. I believe that any further dip can be bought for a bounce. Have a great weekend.

Dancing Between Raindrops

I bought back the 131 SPY Puts that I was short. As long as the 130 SPY puts that I am short expire worthless I will have a small profit in the SPY Puts I traded this week. The profit was tiny but it could have been a lot worse because I was trading from the long side.

I shorted the SPY 128 Puts expiring in two weeks. This is a larger position.

Screwflation: Part Two

The CRB index of commodities is actually up on the week despite the terrible economic data. One week doesn't make a trend but this bears monitoring. A weaker economy and higher commodities could put the Fed between a rock and a hard place.


While equities have been whacked all week long, commodities hang in there. This is the worst of both worlds. To quote Doug Kass, we are seeing "screwflation".

My Hands Are Tied

While I would have liked to do some buying this morning, I did nothing. I am short 131 and 130 SPY Puts expiring at the end of the day and was unsure whether I was going to have to take delivery. If we remain around these levels towards the end of the day I plan on doing some shopping.

Getting Constructive

For the first time in a long time I am sensing a lot of bearishness out there. It has become difficult to find a bull. I prefer to invest in this type of environment because stocks are no longer priced to perfection. The statistics are not yet lining up for the long side but they are starting to get there.

If we get another down day the market will be oversold on a very short term basis. We have seen heavy put buying for two days now and another day of this should have us primed for a rebound. However, this oversold reading won't last for long and to get good oversold readings we will need to go down further.

I am torn because my sense is that I should start getting more aggressive on the long side but the numbers are not quite there yet. It is likely that I will pick up the pace of buying into further declines but still hold back until the numbers line up. Other than my short out of the money put positions, I am less than 20% invested. This leaves me with a lot of room.

Don't Chase

A lot of traders have been getting tossed around recently. This is no longer a momentum market where one can buy strength. The name of the game is to buy weakness and sell strength. Have a good night.

Roll Down

I bought back the 132 SPY Puts that I am short and instead wrote the 131 strike. I know this options talk is confusing for many. Earlier in the day I took a more bullish position and I now moved to a less bullish position. To put it simply I have been buying weakness and selling strength.

Big Hits

There is another alleged Chinese fraud in the news today. The company had a greater than $4 billion market cap at the beginning of the day. The symbol is TRE.TO and it trades in Toronto.

John Paulson holds a $650 million position in the name which accounts for nearly 2% of his funds under management. If the company turns out to be a fraud that would be a serious hit.

There were other large hedge funds that were caught in Chinese frauds as well. These types of events lower risk appetites. I know I am more cautious after  a loss.


Sold SPY Puts

I have sold the 130 SPY Puts expiring tomorrow naked. There seems to be unanimous bearishness out there right now. Even if we first go lower I believe we are getting close to a bounce.

An Explanation On Goldman

This subpoena of Goldman has been one of the most telegraphed events. There have been press reports, articles and even an analyst downgrade surrounding a possible indictment. Over that period the stock price has dropped precipitously.

Goldman's tangible book value is expected to be $133 at the end of this year. The puts I sold would put me in the stock with a cost basis below $124. Even assuming this indictment costs them a pretty penny and estimates miss I should still be in the stock below tangible book. The CEO has said the company has excess capital and wants to buy back stock aggressively but first wants to settle legal matters.

Goldman Sachs is not the money machine it used to be nor do I think it will return to its former glory. But its still worth tangible book.

So Far, So Good

In the early going we are seeing put buying and the market is hanging in. That is what the bulls want to see. Its still early and the data is very preliminary.

Goldman Subpoenaed

I have written the June 125 Goldman Puts. That would make me long GS below tangible book.

A Look Back

Yesterday, decliners outnumbered advancers on the NYSE by 1975 issues. The last time we had a reading that large was February 22. That was also similar to yesterday because the decline came after a rally. The following day the S&P 500 fell 8 points, followed by another 1 point decline. After that the S&P 500 rallied 13 points. The rally carried a bit further but fizzled out quickly and the market made new lows shortly thereafter.

That was a pretty textbook response to such a reading. As I mentioned earlier there is usually a weak rally after an extreme reading like we saw yesterday.


A Bounce Is Possible

Particularly nasty days like yesterday tend to lead to bounces. However, since none of the other indicators are lining up I would not expect much more than  a weak bounce.

Waiting For The Extremes

The market has not had a good overbought reading since the first day of May. Had yesterday been an up day we would have had a decent overbought reading. This is a far cry from what occurred from September through March. In that seven month period there was only a single good oversold reading, following the Japanese earthquake. The market had too many good overbought readings to count.

For seven months it did not pay to wait for a good oversold reading because they did not happen. The recent action fortifies my belief that the market has changed. I believe it will now pay to be patient and wait for the extremes. Last Summer saw four meaty rallies that started from bearish extremes.

The following is what the ideal bearish extreme would look like:

  • A 10 trading day period where the vast majority of days are down. The bigger the down days the better.

  • During that 10 day period there should be a lot of put buying

  • A spike in the VIX

  • End of the World talk from pundits.

  • Extreme bearishness in the sentiment surveys

  • Rydex traders positioned very bearish

Currently none of these conditions have been met as we only had a single down day. That does not mean we can't rally, only that I believe there will be better risk/reward opportunities this Summer.


We have not seen a day like this in a long time (August). While we could see a bounce, this does not seem like a great buying opportunity. Its a good start. If today is any indication the Summer should be fun. Have a good night.

Snap, Crackle and Pop

I must admit to being surprised by the magnitude of today's decline.  I am doing little. I only want to swing at fastballs right down the middle and a one day decline does not meet that criteria. I will throw a bone to the bulls and admit that I am starting to sense some fear. This might normally have me playing for a bounce but as I wrote earlier, until Europe is resolved I am being extra cautious.


Wrote Microsoft Puts

I have written some June Microsoft 24 Puts. This is a baby step.

March 1 Replay

  • I mentioned March 1 in my opener as an example of what could happen when the first of the month effect is front run. While I thought we could see a down day, I did not think that we had March 1 potential today.

  • The fact that sentiment never became extreme and that there was not much  fear during last week's downdraft makes it harder for the market to rally well.

  • Commodities are not down all that much today. Stagflation anybody?

  • I remain of the belief that the market is meant to be traded, not owned this Summer.

  • I remain short the 132 SPY puts expiring this Friday. This is a very modest position.

  • I am not willing to get aggressive on the long side until one of the following happens: Greece defaults or the ink on a new bailout is dry or we see real fear. Until then I am playing small.

Getting Overbought

For the past few months we have been in a trading market where the market statistics have actually mattered. Both oversold and overbought readings have been working. I believe this will be the case for the remainder of the Summer.

The market has been up for four days in a row. If we manage an up day today the market will have been up five days in a row and we will have a weak overbought reading. I would then expect a pause at minimum for the remainder of the week.

Today is the seasonally strong first of the month and the last day of  the oversold reading. Seasonality has worked exceedingly well over the past year, which means many have been front running the effect. The risk is that all the front runners turn sellers as occurred on March 1. If we get a down day today the balance of the week becomes a tougher call.