This is a difficult market to analyze because this week’s close gave fuel to both cases in my opinion. The bulls can argue that the way we rebounded off the lows on Friday is bullish, while the bears can say that this is the start of a larger decline. Next week will likely cloud the picture even more with a holiday shortened week and light volume.
The VIX shot out of a giant wedge on Friday and then closed the gap
on the 60 minute chart. So far that is normal when you see that it was
rejected at it’s first attempt to break through resistance. It will be
critical that this finds supports and launches higher if the bears want
to see further gains. If we fall back into the base then we’re likely to
see a bullish to flat bias next week.
Thursday, December 27, 2012
There is much debate whether when it comes to the total notional size of outstanding derivatives, it is the gross notional that matters (roughly $600 trillion), or the amount which takes out biletaral netting and other offsetting positions (much lower). We explained previously how gross is irrelevant... until it is, i.e. until there is a breach in the counterparty chain and suddenly all net becomes gross (as in the case of the Lehman bankruptcy), such as during a financial crisis, i.e., the only time when gross derivative exposure becomes material. But a bigger question is what is the actual collateral backing this gargantuan market which is about 10 times greater than the world's combined GDP, because as the "derivative" name implies all this exposure is backed on some dedicated, real assets, somewhere. Luckily, the IMF recently released a discussion note titled "Shadow Banking: Economics and Policy" where quietly hidden in one of the appendices it answers precisely this critical question. The bottom line: $600 trillion in gross notional derivatives backed by a tiny $600 billion in real assets: a whopping 0.1% margin requirement! Surely nothing can possibly go wrong with this amount of unprecedented 1000x systemic leverage. (more)
The "Chart of the Day" is Kansas City Southern (KSU), which showed up on Friday's Barchart "All-Time High" list. TrendSpotter has been long since Dec 14 at $81.89. In recent news on the stock, FBR Capital downgraded KSU to Market Perform from Outperform. Barclays initiated coverage on KSU with an Equal Weight and a target of $81. Wells Fargo said on Nov 28 that ONEOK's cancellation of its plan for the Bakken Express Pipeline is a positive for Union Pacific (UNP) and Kansas City Southern (KSU) since those two railroads move crude oil from the Bakken and other shale oil areas. Kansas City Southern, with a market cap of $9 billion, is a transportation holding company. The company's North American rail network comprises approximately 6,000 miles of rail lines that link commercial and industrial markets in the United States and Mexico. KCS also owns 50% of the Panama Canal Railway Company in Panama.
The analyst community is monitored closely for their opinions on stocks. Just look at how much a stock will gap higher or lower based on a single upgrade or downgrade.
Many investors follow analysts' recommendations as they like to buy and hold along with the "crowd." Let's face it, there's a feeling of security knowing that there are others buying or selling what you are buying or selling. But for us, the analyst rankings serve as a better tool, one that helps us to beat the market.
If you have the ability to determine when a stock is more likely to get upgraded by the analysts, then you've got the potential to get into a stock before it gets the boost of the upgrade buying. This is why we track the performance of our database of 7,000 stocks against their respective rankings. The concept is simple: Stocks that are outperforming the market that have low analyst rankings are more likely to see upgrades in the relatively near future.
Typically, we like to look at companies that have more than 20 analysts covering them, as a stock with very few analysts has less of a chance for upgrades. For today's purposes, we've filtered for companies that have outperformed the S&P 500 by more than 20% over the past three months, providing an interesting list of prospective intermediate-term bullish candidates for the new year.
Starting at the top of the list, this mega-bank spent much of 2012 dealing with uncertainty surrounding potential increases in regulation in the banking industry. The fact that share prices remained below the $10 mark served as a Scarlet Letter of sorts as fund managers and professional money managers often avoid such low-priced shares.
Now, for the first time, the technical picture for BAC is improving as the price is preparing to cross above the 200-day moving average for the first time since 2007 (yes, nearly five years). The improved technical picture, along with a fundamental improvement in the balance sheet, should get the upgrades rolling in 2013. We're targeting a move above $15 before May of 2013.
Recommended Trade Setup:
-- Buy BAC at the market price
-- Set stop-loss at $10.50
-- Set initial price target at $15 for a potential 33% gain in five months
United States Steel Corp. (NYSE: X)
The steel sector has taken a beating since peaking in 2011. Lower demand for steel due to a slowdown in global economies (China, etc…), along with weaker demand in the auto industry, have had the steel manufacturers on the ropes.
As we move into 2013, the global economic outlook appears to be leveling off, if not improving. In addition, the latest expectations from Detroit are that we will see a gangbuster year in auto sales as improving consumer sentiment and an aging commercial fleet will push buyers into the showrooms.
Technically, X shares are getting healthier. With a recent rally to the $24 level, X has broken above its short-term and intermediate-term technical trendlines, suggesting that the stock is ready to see a long-term improvement in price activity. We're expecting these factors to drive some of the 22 analysts covering the stock to start upgrading their views, helping to move X to the $35 price point before the end of May.
Recommended Trade Setup:
-- Buy X at the market price
-- Set stop-loss at $23.35
-- Set initial price target at $35 for a potential 46% gain in five months
Yahoo (NASDAQ: YHOO)
This Internet icon appeared to be all-but-dead as leadership problems in the boardroom led to fledgling stock prices. With the new CEO Marissa Mayer at the helm, the company appears to be on a path to realizing their brand potential again.
Following up on the CEO hire, December has seen some changes of board members, which will likely help the fundamental drivers for the stock. Will YHOO be the next Google (NASDAQ: GOOG), probably not, but they are turning up the heat in the content world again.
We've already seen Goldman Sachs (NYSE: GS) add the stock to its "conviction buy" list recently, but 72% of the analysts covering the stock still have it ranked a "hold" or "sell."
YHOO prices have outpaced the S&P 500 by more than 25% over the past three months as the stock is now trading in its own bull market rally mode. Breaking through the $20 price will free up room for YHOO shares to surge to $25. In our opinion, this is likely to happen before the end of April, sooner if the analyst community wakes up to this performer.
Recommended Trade Setup:
-- Buy YHOO at the market price
-- Set stop-loss at $18
-- Set initial price target at $25 for a potential 29% gain in four months
at 12:03 AM