Thursday Review: Investors' Risk Appetite Returns

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Includes: GS, IYR, SPY, TBT, TLT, TSO
by: Vikram Saxena

The US equity markets bounced back Thursday after the large losses registered on Wednesday. The equity markets shook off a slightly worse than expected job-loss data with across the board gains. Stocks sold off at the open, and tested Wednesday’s low on the SPX. However like Wednesday, the ES futures bounced off the 880 level, forming a double bottom. This set the stage for a bounce which lasted most of the day.

The rally was led by the financials, technology and agricultural stocks. The Russell2000 Small caps led the indices with a 1.40% gain, showing an increased risk appetite among investors. On the fixed income side, treasury bonds were bought today and the yields slipped further.

Rally Stalls at SPX 900

After forming a double-bottom at ES 880 level, the markets had a strong run reaching a high point near 897 corresponding to the 900 level in the cash SPX index. Market internals continued to improve all day long, with the rally. However, the indices seem to hit a brick wall around the 900 level on the SPX cash index and pulled back sharply in the last hour of trading. The indices finished in the middle of their range yesterday.

Lack of Conviction: Range Bound Action?

The price action suggests a lack of conviction among both the bulls and the bears. The bulls defended the 880 level on the ES but the bears responded with conviction near the 900 level on the SPX. Though the buy-the-dip mentality is intact, there is also some fear of a sharp pullback, resulting in shorter holding periods and a trigger-happy towards profit taking.

Insurers Get TARP Funds:

The market is likely to welcome the news that a number of insurers will now get access to TARP funds to help bolster their balance sheets. Insurance plays a critical part in the functioning of an advanced economy, and better capitalized insurers is likely to help boost confidence, not only for investors, but also the consumers and businesses who rely on them to manage risks.

Friday’s Outlook

Today is expiration Friday, and it is likely to be a volatile day with a bullish bias. There is some economic news related to inflation and consumer sentiment which may move the market a bit. However, if the reaction to Thursday’s Job Loss number was any indication, these indicators are unlikely to move the market in a big way.

There is some expectation that the SPY will pin around the 90 strike because of the large open interest in options near that strike. I do not expect the indices to break to new highs today; I also do not expect them to breach the support levels put in yesterday.

My Portfolio: Reviewing the IYR Chart

I used the morning weakness to book profits on my remaining puts on the IYR. After the market rallied into the day, I bought back some of the puts back. I expect IYR to trade in a choppy manner but with a bearish bias. The ETF has broken its upward sloping channel and after a pullback is now testing the trend-line from the downside. A failure to break above the trend-line and back into the channel is likely to result in a stronger downward move. Most of the commercial REITs have already raised a lot of capital via secondary equity offerings, and any support provided to them by the underwriters is likely going to dissipate.

IYR Channel Break

From a trading perspective the large intra-day range of the IYR provides ample opportunity to swing trade. An active trader can increase his or her leverage by either using the ultra-ETFs (URE and SRS) or by using options.

Trading Intra-Day Patterns: Goldman Sachs

I also traded Goldman Sachs (NYSE:GS) on the short side late in the day. Goldman was forming a wedge pattern which broke leading to a large spike down. I had posted the setup via twitter well before the entry-signal was generated. The trade was to short Goldman (either outright or by buying a put) when it broke the lower trend-line of the wedge. The break of the wedge resulted in a $1.0 move in a few minutes.

My Portfolio: Independent Refiners

My out of the money June calls on TSO did very well today as the refiner jumped up 7% today. TSO found support at the rising trend-line from the March low, and continues to trade in a rising channel. With the summer driving season coming at a time of rising consumer sentiment and moderate oil prices, the refiners are likely to perform well. By some estimates, the refiners are trading at a discount to the replacement value of the physical refineries, and are attractive takeover targets for integrated oil companies.

My Portfolio: Plan for Tomorrow

I do not plan to initiate any core positions tomorrow, unless we get a big spike up which I will use to initiate some put positions. I will roll over any of the in the money May calls I have written on the TLT to the June expiry. Though I will not be surprised if this rally continues, I feel the risk of a significant pullback is becoming higher and the rewards do not justify chasing this rally.