TUESDAY, APRIL 15, 2008
Will Intel Live Up To Its Usual Disappointment?
04/15/08 3:15 PM EST
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As of: SPX 1346 |
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Along with a slug of economic releases tomorrow morning (CPI, Housing Starts, Industrial Production), we'll be grappling with the after-effects of Intel's earnings release which is scheduled after today's close.
The market has typically not acted kindly to Intel's reports. The morning of their earnings releases, the Nasdaq 100 has gapped down 60% of the time, including five of the last seven times. If the NDX was positive the day before INTC released, then the next morning it gapped down 67% of the time since 1997. Performance in the NDX from the open to the close was in line with random.
Despite this known tendency, traders still tend to buy into the NDX the day before an INTC earnings release, as it has closed up 63% of the time, including 7 of the last 10. Likely it's that positive performance the day before the release that sets up the usual disappointment the next morning.
The market in general has not acted well since earnings season began, and expectations have been coming down in response. Perhaps that's enough to counter Intel's traditional disappointment, but I find that kind of stuff very hard to game and don't trade based on it. Especially with all the economic reports being released tomorrow morning, I prefer to hang back and not make any big commitments until I can see what the reaction is going to be.
As I've been noting the past couple of days and again this morning, my focus has been on the Nasdaq 100 from the long side, particularly as it approaches 1780 and 1760 as last-ditch support. It bounced right off 1780ish this morning before recovering a bit into the afternoon, helping to solidify that area as a potential support level. I prefer to trade from the long side in that index as long as we're seeing this kind of behavior.
I'm carrying only small positions here, and don't see an imminent change to that ahead of Intel's report and the econ releases tomorrow morning. If we get some kind of extreme reaction either way to the bevy of announcements, then there may be an opportunity to trade against the reaction, but we'll have to cross that bridge when we come to it.
Secondary Markets Are Holding Up
04/15/08 9:10 AM EST
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As of: SPX 1346 |
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Good Tuesday morning...We begin the day with a modest positive gap in the index futures, with some not-as-bad-as-feared earnings and economic releases allow traders a bit of breathing room after yesterday's uncertain trading.
A few times over the past several months, I've touched on some other markets that have had a heightened correlation to US equities, and how I typically watched them as carefully as I do our usual indicators.
I probably don't mention them as much as I ought to, but over the past couple of days I've been struck by how weak the S&P 500 has been in comparison to those other markets.
One of them is the Euro / Yen cross in the currency markets. Since the October high, the S&P has had a daily correlation of +0.9 (out of a scale of -1 to +1) with the Euro/Yen, which is amazingly positive - in fact, it's an even higher correlation than many of the stocks in the S&P have with the index. This tells us that on a daily basis, the S&P has tended to move extremely closely with that currency pair.
Another asset I've been watching closely is high-yield bonds. If we're going to head into a recession, then corporate bankruptcies could soar, and "junk" bonds should take it the hardest of almost any other asset. I've found that a pretty good proxy for that market that anyone can watch intraday is HYT, the BlackRock Corporate High-Yield Fund. That fund has had a tough time of it, losing 20% from the October high to the March low (though including dividends the loss was more like 14%).
Since the March low, though, the fund has shot up more than 11% and is holding exceptionally well despite the drop in the S&P since last week. The Euro / Yen cross is also holding very well, making up a fairly large loss yesterday.
The graph below shows the three assets plotted together, with relative performance since the beginning of the year. I've drawn trendlines from the March low, showing how all three have rallied together. It's also clear from the graph that the other two assets have been holding up well over the past week, despite the drop in the S&P.
That begs the question - is the S&P going to drag down the other two, or are the other two going to help pull up the S&P? There's no easy answer to that...just because two things are correlated, we can't jump to the assumption that one causes the movements in the other.
I think it's fairly safe to assume that traders in the U.S. have been keying off the movements in the other markets more than the other way around, but it's probably closer to a 50/50 proposition. In any event, if the U.S. equities market continues to flail around in the coming day(s) while these other assets hold up or rally, I'll be inclined to buy more aggressively than I would otherwise.
You don't need Bloomberg to follow these other assets, which have become just as effective as sentiment indicators as the VIX or put/call ratios. A good free source for real-time currency quotes can be found at FX Street. In the "Select Currency" drop-down box, just choose EUR/JPY and it will automatically update the chart. As for the HYT fund, Yahoo! Finance gives as good an overview as any other. I've been watching these both for months, and will continue to until their correlation with the S&P breaks down over a several-week period.
Yesterday I mentioned that given the oversold nature of our short-term models, I was becoming interested in the long side again, particularly in the Nasdaq 100 (NDX) as it neared another support level. We also have some (questionable) positive seasonality here in terms of market performance around tax day and option expiration weeks, though neither tendency is a big factor.
I'm not impressed that financials have gotten hit so hard, and that is certainly a concern here, but with a couple of good earnings reports this morning, we'll see if they can hold up and regain some ground today. I'm still focused on the NDX from the long side, particularly as it holds above 1780, and will be looking to trade it as long as it manages to hold above its breakout level of 1760.
All the best,
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
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