Wednesday, October 24, 2007

Four Generals Will Tell the Story

I am a big fan of market breadth indicators, but when considering whether or not the markets may be at a turning point, I prefer to focus on a handful of leaders rather several thousand small caps whose fortune is never to make it to CNBC’s scrolling ticker. Jeopardy may have “foods that begin with the letter Q” (one of my favorite movie scenes, for reasons I’m still not entirely sure of), but somehow I don’t think we’ll ever hear, “I’ll take micro-cap tickers for $200, Alex.”

Cramer has his “Four Horsemen of Technology” (RIMM, AMZN, GOOG, and AAPL), but this sector focus, while important, is a little too restrictive for my liking. I do think, however, that it is possible to get some meaningful information from watching only four stocks.

Right now, four areas of the economy that I am watching most closely are China, technology, global trade, and consumer spending. These areas just happen to coincide with four stocks that have been market leaders over the past few months, are current or recent members of my OHFdex (Overripe High Fliers Index), have recently made new highs, and probably need to continue to make new highs for this market to continue to the bull march.

In order of recent price strength, the four generals I am focusing on are Apple (AAPL), Baidu (BIDU), Southern Copper (PCU), and MasterCard (MA). Interestingly enough, it is possible that each of these stocks has already made an intermediate-term top. Apple has been the strongest of the group, but following an impressive earnings report on Monday evening, the stock gapped up and has slowly been drifting down since then. It would be hard to proclaim a top in AAPL right now, but the short-term momentum appears to have left the stock. Baidu’s earnings are tomorrow, but the high of October 11th is already starting to look like a possible top, as BIDU trades about 30 points below that high at the moment. Southern Copper has also been drifting down since an October 11th high; yesterday’s earnings report has done nothing to change the trend. Lastly, MasterCard’s high water mark dates from July 13th. The company has been a consistently impressive performer since it’s May 2006 IPO, during which time it has quadrupled in price. For the past three months the action has been mostly sideways, with the stock rising and falling over concerns about the impact of the credit crisis on retail spending.

My personal belief is that all four stocks will continue to come under pressure as the markets grapple with the possibility that the October 11th highs will be hard to take out. I am not a kiss and tell trader and I prefer not to talk about my trading and positions, but since many have asked, at present I am short all four generals, though I will not be short BIDU when it reports earnings tomorrow. For the record, anything less than a blowout quarter and BIDU could be the catalyst that turns the current small market correction into some longer term bearishness.

Now it’s your turn, readers. If you could only follow four individual stocks to divine the direction of the market, which stocks would those be?


Unknown said...

What are your thoughts on the VIX today. It is up 3.66 to 24.07. Is it extended?
I remember that you did some work a couple weeks ago about the VIX performance post FOMC meetings. You correctly showed that the VIX drops significantly the day of the announcement. More importantly, you highlighted that the VIX takes a considerable amount of time (possibly 2 years?) sideways consolidation before the VIX returns to the pre-FOMC levels.
I believe you also illustrated this in your work concerning the 3 times in history that the VIX has dropped 20% + in one day. Coincidentally...It was shown that the VIX also took considerable time to recover to pre-20% decline levels. In the case of the 20% decline day we experienced, I believe the VIX was roughly (don't have a chart in front of me) 25.79ish before it dropped 20% back in Sept. Based on your work, do you believe that today's VIX levels are frothy? Do you feel that 25.79 (let's call it 26) is the ceiling for now?

Bill Luby said...

G'morning, morning.

You can look at the chart I posted Monday on daily VIX and SPX perentage changes and eyeball the current numbers. There is some fear, but not at the levels of what we saw Friday.

Regarding post-FOMC performance, you can find a link to my original article in the "Archive Highlights" portion of the blog in the right hand column. The chart shows that it takes -- on average -- about 9 days for the VIX to return to pre-FOMC levels.

I don't think the VIX is particularly frothy at current levels, partly because I am bearish on the overall markets, but with the VIX's 50 day SMA at about 22, the current VIX levels are tracking fairly close to those numbers. At present the VIX is also about 15% over the closely watched 10 day SMA. While this is fairly high, we have been 15% over this number on about 20 occasions already this year.



Robert said...


Will you consider doing an ISEE post as you are currently bearish on the overall markets.

Sentiment stills seem frothy in the ISEE even with this brutal sell-off. Could that mean more selling is yet to come?

Bill Luby said...

Hi Robert,

Sentiment in the ISEE has seemed rather middling for the month of October, so I have not bothered to comment on it. The same is generally true for the CPCE, although the 10 day SMA did get fairly low on Oct. 15th.

I will certainly speak up if I see some readings of note, but right now I am not seeing the kind of extremes that generate strong signals and good trading opportunities.

Cheers and good trading/risk management,


Mike G said...

OHFdex lol. That's good. I'm not so lucky at tracking the high Beta Superstars you mention, my timing always seems to be just off enough for my stops to get activated and to take a small loss. So I just short companies that are weak and in pronounced down trends, and try not to be too greedy before taking gains. I have puts on LVLT, FBR, DITC and RAD right now.

Bill Luby said...

Truth be told, contrarian one, I think your approach has more legs than trying to guess when a high wire trapeze act is going to fall. Yours certainly are higher percentage plays and carry a lot lower risk, but I have a penchant for swinging for the fences from time to time, even when it means guessing fastball when I get a slow curve...

Anonymous said...

I want to thank you for going through all the trouble to maintain this blog. I don't merely say this to be polite which tends to be the case with most forum interactions on the internet. This blog of yours is excellent I wish there were more like it. I just found it a few weeks ago and its a true gem of the internet. Any how I would be most grateful if you could answer two questions on the the European universe of volatility indexes. Firstly, the three new ones from euronext, have you been able to make any deductions from the limited data? Secondly, do you know of any quality charting service that actually charts the Euro vol. indexes other than Bloomberg and Reuters? These platforms are to exspensive for my needs. Also please exclude the direct website of Deustche Bourse and Euronext the charting is more less useless. Thanks for your time and keep up the good work.

Bill Luby said...

Hi anon.

Thanks for the kind words. Sometimes I wonder why I do this, but if for no other reason, it is nice to have my own personal electronic reference site...

Regarding your questions, I wish I had some better answers, but the truth is that I really don't follow the European volatility indices. I peek at the VDAX occasionally, but it takes a fair amount of work for me to collect data and analyze it (I am using the Deutsche Borse link on the blog.) I did note the three new Euronext volatility indices (AEX, BEL20 and CAC40), but only at your prompting have I decided to see where I might be able to get free data.

In my brief search this morning, I couldn't find anything for the new Euronext volatility indices and the only other free VDAX data I could put my mouse on was some VDAX futures data and charts.

I will keep looking, but surely, some of our less Amerocentric readers will have some better ideas. Anyone?

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