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Yesterday’s announcement included a plan to spend $800 million over the next year revamping existing stores, and a budget of $80 million a month for advertising expenses. JCP’s transition to a low price model is more confirmation of the new retail paradigm covered in our Five Themes for 2012 article earlier this month. The disappearance of a “middle class” consumer segment has made it extremely difficult for mid-tier retailers to compete. As a result, successful retailers will have to pick either an affluent target market (premium price, exclusive attitude) or trade down to meet the needs of the 99% (low cost, maximum value). Retailers that are not already pegged as affluent outlets will have a very hard time breaking into the premium market. Wealthy shoppers may embrace a new company offering premium merchandise, but it’s very difficult to revamp an existing brand to meet the affluent consumer’s taste. So from a merchandise and consumer preference perspective, it makes perfect sense for JCP to trade down to a discount model – offering low prices and attracting a more value-conscious customer base. JCP is targeting $900 million in expense cuts over the next two years, allowing for more flexibility in lowering prices. The move is logical for JCP. Investors believe this will be a major turning point for the company. But there’s a big picture risk that could lead to significant disappointment…
On Wednesday the Fed revealed plans to keep interest rates near zero well into 2014, and refused to rule out more bond purchases. (Einstein once defined insanity as doing the same thing over and over and expecting a different result. These guys must think they’re smarter than Einstein.) As might be expected, the $USD took a dive on news of the Fed’s actions. Ben Bernanke wants to remind us of something: He can beat the dollar like a redheaded step child, and he’ll do so whenever we wants. Equities of course rallied — the Dow reversed to hit its strongest levels since May, up nearly 20% from its October low — and bonds strengthened too on the prospect of forever low interest rates. Gold stocks in particular got jiggy. There is an old familiar macro theme brewing here: Bad medicine hurting the many, while lining the pockets of a few. Europe is in crisis, unemployment remains bleak, and the global recovery on the whole is on shaky ground. But all that malaise becomes reason to rejoice when you have a Santa Claus central bank juicing paper assets (and ignoring inflation risk) with the promise of perpetual ZIRP (zero interest rate policy).
(That actually happened to me, when a guy at the counter found out I was a trader.) Thing is, the actual performance of natty has sucked like an electrolux — nearly cut in half over the past year. We’ve got natural gas coming out our ears, thanks to the miracle of shale. But natty bulls have been getting all hot and bothered this week, as a result of serial over-producer Chesapeake throwing in the towel. Via WSJ:
Time to load up on natty? Some traders think so. Open interest on natural gas ETF call options has broken a one-year high, and someone put on a very big call spread on Tuesday (betting that the natural gas price will climb substantially higher by March). Natural gas did make a whopper of a move — nearly 8% — after the Chesapeake announcement. But the backdrop feels sketchy. When oil put in its historic bottom near ten bucks a barrel in 1999, the mainstream media was calling for it to go to $5. IThe Economist featured an infamous cover (which I have framed) that read “Drowning in oil.” In other words, bearishness was at an extreme when oil bottomed. You certainly didn’t have Joe Sixpack salivating. This natty spike, in contrast, is maybe the most anticipated start to a hoped-for (and much delayed) bull market in commodity history. And check out how it registers (or rather doesn’t register) on the weekly chart:
So far this year, the overall market has traded with a significant amount of resiliency. Despite ongoing uncertainty from Europe, weak manufacturing data from China, and growth concerns in India, equity prices have continued to advance. This is a welcome shift from last year’s environment of constant shifting between “risk on” and “risk off” – with few trends, sector differentiation, or sustained trade opportunities. Today’s Teflon market (bad news doesn’t stick) makes sense as managers scramble to keep up with benchmarks, and its not surprising to see high beta names being accumulated. While two weeks ago we had the “official” start to earnings season, this week earnings reports are picking up momentum with dozens of names reporting each day. The information flow gives us a good chance to evaluate both fundamental and sentiment strength. The key in this environment is to look at not only the data being reported, but more importantly the reaction to individual company releases. Just because a company “beats expectations” doesn’t mean the stock will shoot higher. Management guidance, whisper numbers, product commentary, and a myriad of company-specific items can affect the trading reaction. Our trading book is now almost exclusively bullish (with a short euro trade as our only bearish position), but we still have a material amount of cash and the ability to use leverage if the environment continues to strengthen. We can shift our exposure quickly if necessary, but for now the reward-to-risk is attractive for adding bullish exposure on pullbacks to support or breakouts from wedge patterns. Below are a few of the areas we are watching carefully this week… Continue reading View From the Turret: A Day Late and a Dollar Short Editor’s Note: Today we have a third article from Nathan O. – who is the brain behind our newly launched service, Global Trend Capture. Over the past several years, Nathan has been perfecting his trend following system and generating some very attractive returns. Today, Nathan offers some great wisdom in terms of setting up a trading system and not allowing emotions or “intuition” lead to poor trading decisions. Too many would-be successful traders ignore these concepts just enough times to sabotage what would otherwise be a profitable system. If you’re interested in learning more about the Global Trend Capture service and how you can receive a risk-free 45 day trial, simply follow this link. I’m confident that you will find Nathan’s comments insightful and applicable to both discretionary as well as mechanical traders. Trade ‘em well!
Trading From a Position of StrengthEditor’s Note: Today’s article is penned by Nathan O. – our trend following expert. This week, we launched the Global Trend Capture service which offers trading signals based on Nathan’s proprietary trend following system. The steel sector is an area that is improving both fundamentally and technically – so we asked Nathan to share any insight his system could shed on the group. It looks like a number of good trades are setting up! If you’re interested in learning more about the Global Trend Capture service and how you can receive a risk-free 45 day trial, simply follow this link or click on the blue banner below. I’m confident that you will find Nathan’s comments insightful and applicable to both discretionary as well as mechanical traders. Trade ‘em well!
Special Report: Steel Sector (Technically Speaking)
Editor’s Note: This week we officially opened registration for our new Global Trend Capture service. This trend following service has been in “beta testing” for the last month and we have received some great feedback from readers who have been following the trends. Along the way, we received a number of insightful questions from readers that Nathan addressed in a special report. We felt the content was applicable to the entire Mercenary community, so we are publishing the Q&A report along with a more personal message from Nathan below. If you’re interested in learning more about the Global Trend Capture service and how you can receive a risk-free 45 day trial, simply follow this link or click on the blue banner below. I’m confident that you will find Nathan’s comments insightful and applicable to both discretionary as well as mechanical traders. Trade ‘em well!
SPECIAL REPORT: Sharks
Equity markets are following through on last week’s breakout, and the overall sentiment is shifting into more positive territory. Expectations for an economic rebound are still relatively tame, but investors are more willing to put capital on the line and institutional managers fear missing out on a move more than they fear absolute losses. This week, earnings season picks up with a number of key financial names reporting – along with plenty of other industry leaders. Financial stocks took on heavy losses last year, but still represent an important part of the global economy. As sentiment improves in this sector, the dynamics shift towards a scenario that favors rising price action with relatively strong support. Financials are still a good barometer for the entire market. Whether the strength is temporary, or indicative of a longer-term trend, the shift in momentum is bolstering confidence for a number of other key areas. Last week we noted strength in fertilizer stocks, steel manufacturers, and the semiconductor sector. Biotech and a number of technology sub-industries are also moving higher. This will be an important week to determine if the strength can continue or if earnings reports will dampen investors’ enthusiasm for this rally. Our trading book has picked up more bullish exposure over the last week and while we still hold a relatively light amount of exposure, our bullish commitments are now about double what we are allocating to bearish bets. Things can shift quickly during earnings season. Below are some of the key areas we are watching this week… Think setting up a trading methodology and process is intense? Try raising capital to manage professionally! Capital raising is one of the most difficult parts of the money management business – and that’s true even for battle-tested veterans! Emerging managers are finding it especially hard to raise institutional funds as their small size prevents them from even showing up on the radar of institutional allocators. But there are some alternative methods of capital raising that offer opportunities to managers looking to build a professional shop. Click on the video below to hear an interview with Bryan Borgia – founder of Topwater Capital Partners – and hear how he is allocating tens of millions to individual managers to help them kick off their businesses (bullet-point outline of key points below the jump…)
Whether you are an individual trader, have set up your own shop, or operate under a larger company’s structure; every trader has to wear multiple hats… Successful traders must be skilled at a number of different functions including idea generation, security selection, industry and stock-specific research, trade execution, risk management, performance tracking and reporting etc. Even if some of these functions are handled by an administrative team, it is still important to keep your finger on the pulse of all of these areas to maintain the best returns and lowest amount of risk. But how do you create time for all of these tasks? How can you effectively research new ideas, manage an existing book of trades, communicate with clients, and still have time to eat and sleep? Reader David F. recently posed the question:
Well, the short answer is that there really is no “short answer.” Trading is hard work and to do it right, you MUST allocate a significant amount of time to administrative and trade management tasks – in addition to the more “sexy” research and execution functions. But creating efficient processes to your trading approach can save a tremendous amount of time – and in this business where time truly is equivalent to capital, efficiency is a beautiful thing.
The question at this point is whether the strength in US markets was an indication of underlying strength (not falling even though headlines from across the pond continued to be negative), or if it was simply a seasonal issue with money managers putting new capital to work regardless of the overall economic environment. This week we should get more clarity as earnings season officially kicks off with Alcoa Inc. (AA) reporting after the close today. The company already pre-announced restructuring charges last week, and the expectation is for a drastic reduction in earnings as a direct result. But traders will be listening carefully to the conference call to determine if management can confirm early signals that the global manufacturing environment is rebounding. Friday’s jobs report offered a few additional optimistic data points, with the unemployment rate ticking down slightly and private payrolls adding more jobs than expected. With economic reports now coming in above expectations, it wouldn’t be surprising to see US stocks break above resistance levels and run for a few weeks. Even though overhead risks are still in place, investors have been aware of these issues for some time, and are now dealing with headline fatigue. A few weeks in rally mode could set up some excellent short opportunities (remember, the risks are still in play), but in the meantime we are approaching our trading from a more balanced perspective – looking for good reward-to-risk opportunities to add bullish exposure. Below are a few of the areas we’re tracking for the week ahead… Continue reading View From the Turret: Strength or Seasonal Effect?
Last week we laid out five themes for the coming year. One of the key issues that we outlined was an adjustment by retailers to account for the disappearance of the middle class in the US. Consumers today are likely to fall into a binomial model with one of two extremes. Either they are healthy spenders with stable jobs and plenty of discretionary spending power, or they are struggling to keep it in the road and looking for deep value every time they pull out their debit card. The mixed results this week show that retailers are in fact seeing this dynamic in play and scrambling to adjust to the new consumer environment. For the most part, retailers catering to the middle class saw disappointing results while chains that are focused on offering deeply discounted merchandise saw gains. The luxury retail environment may be particularly challenging as a number of mid-tier retailers attempt to “trade up” to compete with the higher class retailers. From a trading standpoint, it’s important to begin building a list of expected winners and losers in this environment – and then scanning the charts on a daily basis for entry points with good reward-to-risk dynamics. It’s still a difficult period to buy breakouts or short breakdowns. The market is still showing too many “reversion to the mean” tendencies. But isolating names that have already broken out of patterns, and then entering after a pullback or consolidation offers two advantages:
Let’s take a look at a few of the retail stocks that are setting up on either side of the ledger:
The confetti has barely been cleaned up from Times Square and already traders are throwing their own ticker-tape party. S&P futures are indicating a sharply higher open as international markets embrace the optimism that comes along with a new year of trading and a clean slate in terms of performance. Given the uncertainty of the past year, it has only been natural for portfolio managers to limp into 2012 with low levels of exposure and risk kept at a minimum. Ironically, for under-invested managers, this bullish start to the New Year carries its own unique risk as managers are immediately put behind the performance curve and into “catch-up” mode. For this reason, fading the early gap may be a dangerous proposition as mutual funds struggle to keep up with benchmarks from the very beginning. Even on the first day of trading, performance anxiety can be a powerful motivator for chasing the trend. So there could be a tremendous amount of dry powder behind this morning’s strength. Looking farther down the road, the environment is still very difficult to handicap. Economic risks are significant and well-documented. From Europe to China to the Middle East; growth is either in danger of turning negative, or at best, in danger of disappointing the consensus. Until this choppy environment resolves one way or the other, we’re much more inclined to pick our spots with specific sectors, or set up spread trades that benefit from volatility decay – rather than making an overall directional call on the market. But that still leaves plenty of room to pick off strong trade opportunities and take some high-probability income trades to pad our capital until the broad trends emerge. Below are a few of the areas we are watching closely as we enter a new year of trading… Continue reading View From the Turret: New Year, New Breakout
Across the globe, many important variables are in flux. Economically, we continue to deal with seemingly insurmountable sovereign debt issues that ultimately affect the livelihoods of millions… Socially, the world is watching to see how political structures in the Middle East continue to evolve, and the death of Kim Jong-il raises many questions for North Korea’s future effect on the rest of the world. Politically, this is an election year in the US – complete with a clash of perspectives on how to grow the US economy, create jobs, and achieve a more level playing field for the middle class. As traders, we’re very skeptical of “predictions,” finding little value in analyst price targets for the major markets, or revisions to GDP expectations for the coming year. These reports may carry some relevance if they lay out alternative scenarios that could cause market sentiment to shift one way or another. But the actual “predictions” themselves are usually less valuable for a flexible trader. After all, there’s a big difference between being right and making money. Turning the page on the calendar and looking at the year ahead, I see five significant themes that will affect market action. I’m not going to make a “prediction” on any of these themes – but rather lay out some scenarios that could cause price movement (and profit opportunities). As we trade our way through the coming year, I expect the following areas to be particularly relevant for traders:
We’ll break out each of these themes below the jump…
Not only is this week pared back to only 4 sessions, barring any huge event in Europe, each day should feature anemic volume making it difficult for the heavy hitters to move any material amount of exposure. The light holiday trading has a natural tendency to create choppy action – and in this environment, short-term chart patterns become unreliable and any trading signals should be taken with a grain of salt. It’s little wonder that many professional traders take this week off because of the poor reward-to-risk characteristics. At Mercenary Trader, we’re still manning the desks, but the focus this week is on outlining some of our plans and goals for the coming year. 2011 has been a tremendous year of growth for us, and 2012 will be no different. We have a couple of new services in development right now – along with some exciting partnerships we are setting up with companies who offer premium trading resources. All of these initiatives will help to improve the quality of our content, the profitability of our trades, and allow us to cover more opportunities on a day-to-day basis. I’m tremendously excited about the coming year and look forward to hearing what you think about the new opportunities in the coming months. For this week, we’re much more focused on managing our existing positions – tightening risk points and watching for pyramid opportunities – rather than aggressively pursuing new setups. With light-volume choppy action, chart patterns tend to become less reliable and we would rather wait for better conditions to lay out new exposure. Below are a few trades we are currently tracking – (all actual trades time-stamped and documented in the Mercenary Live Feed) Continue reading View From the Turret: Light Holiday Trading |
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Investors in JCPenny (JCP) were treated to a nice rally yesterday after the company announced a major strategic shift. The department store retailer is deviating from the long-time tradition of artificially high prices and continual “discounting” – opting instead to adopt an “everyday low price” structure.
The old cliches stick around for a reason. “Don’t fight the Fed” is back on traders’ lips after yesterday’s policy driven rally.
Poor natural gas bulls. The general public has been patiently bullish on natty for years now, with the kind of fervor that makes you hear unsolicited “buy natural gas” tips from taxi cab drivers in local diners.
Taking a drastic step to stem a glut of natural gas that has pushed prices down 45% in the last year, the nation’s second-largest producer said it will slash gas drilling by nearly half.
Apologies for the delay in this week’s VFTT…
There is a lot to this game of trading…
