| Current Trading Strategy |
| Trading both long and short around earnings while taking profits early and at key resistance/support areas for all after-the-news trades. |
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Top-Down One of our favorite charts over the past several years has been the S&P 500 against the inverted four-week moving average of the weekly initial jobless claims (so the gold line on the chart below moves lower when jobless claims rise). The two lines have been highly correlated and it has shown to be a shorting opportunity when the black line of the S&P 500 has moved away from the gold line of the jobless claims, especially when the claims data worsened …and vice-versa. For most of 2012, the initial jobless claims data has been flat, which meant rallies in the S&P 500 were to be sold. The buying opportunities over the past few years have been when the black line fell below the gold line and then initial jobless claims improved. We prefer to look at the moving average of claims because the numbers can be volatile from week to week, and that has certainly been the case lately.
Several weeks ago, California failed to report all of its claims data, which skewed the numbers to their best level in years as circled on the next chart on the below, which does not smooth the claims data with a moving average. The next week the missing data was included and the claims data quickly reversed to around its worst level of the year. On average, the claims data has worsened modestly since California’s error even with last week’s improvement. The problem is last week’s improvement seems certain to be another error – this time on the other coast. Many offices in New Jersey were closed due to Hurricane Sandy and even others were without internet access and phone lines. The claims data from these areas were not included in last week’s report. So, on Thursday, when we get the latest numbers, it is going to see an increase in new jobless claims just by including the missing data from the previous week. That is in addition to the risk of new jobless claims from the hurricane because of the business disruptions.
Since the black line remains above the gold line on the chart, and the gold line is most likely going lower this week, we see little reason to believe the S&P 500 has stopped dropping from its mid-September high. There is evidence that we are still weeks away from a buying opportunity too in our chart of the S&P 500 below. Over the past several years we’ve seen an increase in option and derivative products and this has distorted what was a very good buy and sell signal in our put/call oscillator on the chart. As a result, we’ve not relied on the data as we have in previous years. Still, the objective of the indicator is to identify when too many investors are betting too heavily in one direction, which tells us it is time to begin trading in the opposite direction. Over the past 12 months, it seems we’ve found a spot where the number of put options relative to calls places just such a floor in the stock market. Our put/call oscillator is currently a long way from reaching that level.
Of course, the biggest risk to shorting the market right now is the Federal Reserve and November is not a month where the Fed is sitting around leaving the market to its own devices. The Fed pumped a lot of money into the system at the beginning of the month and is going to continue supporting the market for the rest of the month, but most of it is going to come at the end of the month following the Thanksgiving holiday. So if prices are going to continue falling, there is a better chance ahead of the holiday weekend than afterwards – and that is consistent with the seasonality we mentioned last week. Still, the Fed is not alone and other central banks are doing the part to support the markets and eventually market participants are at risk of becoming too reliant on the Fed liquidity and fail to see the fundamentals. Over the past couple of weeks, we’ve been pointing out this with the Japanese Yen, especially against the Euro, British Pound, and the Canadian Dollar – with all at points that have marked tops in the S&P 500 over the past several years. The one important currency that we’ve left out of this discussion is the Australian Dollar. The basic strength of Australia is selling minerals to China, so to see where the fundamental trends within Australia are heading, we like to look at copper and the Chinese stock market. The chart below shows the past five years of the Australian Dollar, the copper ETF (JJC), and the Dow Jones Shanghai Index (DJSH). What we don�t show at the bottom of this chart is the fact that the Shanghai put in a double top with the first top coming in 2007. The second top is shown on the chart with a “1” next to it. It wasn’t long after the Shanghai index rolled over that copper topped. A couple of more months and the Australian Dollar topped. All three bottomed in 2008 at least two months before the S&P 500 bottomed in early 2009. Since then, we saw the Shanghai flat line and eventually rollover. Then in early 2011 copper topped and that was followed by a top in the Australian Dollar. Since then, the Shanghai index has continued to put in new lows, copper has yet to put in a higher-high and is at risk of rolling over even more with a potential head and shoulders pattern, and now the Australian Dollar, after making a series of lower-highs, is nearing a trend line from its 2011 top.
Bottom-Up Hibbett Sports – trade on Dick’s
That’s good news because both stocks are trading below their average forward PE multiple, so if estimates move higher, it supports even more upside in the stock. Hibbett, for example, has historically traded at 19.3 times forward estimates, which suggests there is upside room for the stock to move above $58 using current estimates. Meanwhile, though, when we look at the chart for Hibbett, we see a downward trend line that puts resistance just above $58. Therefore, after-the-news, we have to see evidence that the checks are right and estimates are going higher and we need the stock to get to $59, for a trade to new highs. Still, Hibbett is scheduled to report earnings before the market opens on Friday, November 16, 2012 while Dick’s is scheduled to report before the market opens on Tuesday, November 13, 2012. One trade that has worked historically when Dick’s closes higher on earnings and it reports before Hibbett, is to buy Hibbett ahead of the news and hold until the close following its own report for an average gain of 9.53%. Much of this came off the March 2009 lows when the trade in Hibbett gained 29%, but even excluding this one trade, the trade still averaged 7.75% and was successful eleven out of 13 times (12 out of 14 if you include March 2009). For more of our bottom-up coverage, as well as other trading strategies and sector charts, please go to http://www.earningswhispers.com/subwr.asp?artno=424&adv=WR424f. |
So far, we’ve not seen any checks that tell us retail sporting goods stores such as Dick’s Sporting Goods (
Pelias' views 