Markets were down in Asia overnight on news that there was a skirmish between North Korea and South Korea after a North Korean ship launched a small attack on a small South Korean island in which several dozen homes were destroyed with a few casualties. Hong Kong was down 2.7%. The story is much the same in Europe with London down 0.75% and Paris down 1.5% and bond spreads widening dramatically in Spain. Commodities are down slightly with the dollar stronger against the euro in particular. Futures are much weaker in reaction to all of this. GDP came in pretty much as expected with existing home sales (4.42 million units) due out at 10AM and the November 3 FOMC Minutes out at 2PM. Today will be a headline driven day with eyes focused on news out of South Korea and Spain. The Korean situation should be stable for the day, but it’s a volatile environment. Focus on the myriad of earnings and relative strength plays with a compressed time horizon on lesser trade size on entries.
On Friday night around 8:30PM, a seemingly noxious story broke. The story gained traction over the weekend to the point that when I had a chance to get an update in between a myriad of some other major personal happenings, I looked at it. It was on the national news and every major news outlet out there. Somewhat surprisingly to me, it caught not only most traders who didn’t glance at the news over the weekend off-guard, but the markets also initially fought off the story with Dow futures up almost 75 points at one point Sunday due to headlines coming out of Ireland. The headline that came across the newswires was as such: “WSJ: US In Vast Insider Trading Probe- Sources.” I saw that headline and my mind went into total conspiracy theory mode from wondering who the sources were to mulling the reason such a story would come out on an options expiration Friday. But read on I did. Below are the relevant portions of that article for brevity sake:
“Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation, according to people familiar with the matter. The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year- end, they say. The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non- public information is passed to traders through experts tied to specific industries or companies, federal authorities say.”
Furthermore:
“One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide "expert network" services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.”
And:
“In another aspect of the probes, prosecutors and regulators are examining whether Goldman Sachs Group Inc. (GS) bankers leaked information about transactions, including health-care mergers, in ways that benefited certain investors, the people say. Goldman declined to comment. Independent analysts and research boutiques also are being examined.
The article finally notes:
“The investigations have been conducted by federal prosecutors in New York, the FBI and the Securities and Exchange Commission. Representatives of the Manhattan U.S. Attorney's office, the FBI and the SEC declined to comment. Another aspect of the probe is an examination of whether traders at a number of hedge funds and trading firms, including First New York Securities LLC, improperly gained nonpublic information about pending health-care, technology and other merger deals, according to the people familiar with the matter.”
The story fed on itself over the weekend but by yesterday, it was given relatively short shrift by the markets except for the fact GS was trading lower pre-hours (although I did note the story twice in yesterday’s comments). But it began playing havoc with stock prices as the day progressed with GS extending to a 55 drop and rumors began flying. There are two major implications here. First, although many people feel strongly that the markets and individual stocks are manipulated, this type of story gives credence to an underlying program- confidence in the markets. Many investors and traders just don’t feel they are on a playing field and this type of story only serves to enhance that line of thinking. Second, on a day trading basis as I discussed on yesterday’s morning call, it can cause random volatility. Nobody knows exactly who is being probed nor do we know what their holdings are. So if there are thoughts that certain funds may have to liquidate and/or sell stock to raise capital, it can spark unusual moves in selected stocks (anything from financials to holdings of said funds). As we enter a low volume period, this story along with the Irish mess and the Korean skirmish will likely serve to dominate the headlines for the next few days if not a tad longer. In what will likely be an increasingly illiquid environment, be well aware that moves can come out of anywhere at anytime particularly in the financial sector and the high beta names so be prepared.
Markets were down in Asia overnight on news that there was a skirmish between North Korea and South Korea after a North Korean ship launched a small attack on a small South Korean island in which several dozen homes were destroyed with a few casualties. Hong Kong was down 2.7%. The story is much the same in Europe with London down 0.75% and Paris down 1.5% and bond spreads widening dramatically in Spain. Commodities are down slightly with the dollar stronger against the euro in particular. Futures are much weaker in reaction to all of this. GDP came in pretty much as expected with existing home sales (4.42 million units) due out at 10AM and the November 3 FOMC Minutes out at 2PM. Today will be a headline driven day with eyes focused on news out of South Korea and Spain. The Korean situation should be stable for the day, but it’s a volatile environment. Focus on the myriad of earnings and relative strength plays with a compressed time horizon on lesser trade size on entries.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
HPQ- decent earnings
SYY- featured on “Mad Money” last night
GMCR- closed near a high after announcing positive accounting changes after an internal investigation
REGN- closed near a high after announcing some positive drug news
AFFY- closed near a high after an upgrade
CRUS- closed near a high after an upgrade
GORO- closed near a high
NOAH- closed near a high
VHC- closed near a high
CRM- closed near a high
AAPL- closed near a high
AMZN- closed near a high
NFLX- closed near a high
LVS- closed near a high
AH- closed near a high
TIN- closed near a high
LULU- closed near a high
FFIV- closed near a high
TSLA- closed near a high
ROSE- closed near a high
JCG- rumored to be in talks to be sold to chairman and buyout firms
BWS- decent earnings
DSW- decent earnings
HRL- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
FMCN- poor earnings guidance
NUAN- poor earnings
BRCD- poor earnings
PSUN- poor earnings
JACK- poor earnings
CPB- poor earnings
Earnings:
TUES NOV 23 BEFORE
CBRL CPB DAKT
DSW EV HRL
MDT PDCO TNP
ZLC
TUES NOV 23 AFTER
JCG TIVO VRGY
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
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