Eve of Earnings Season...

By: Mark McMillan | Wed, Jul 9, 2014
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7/9/2014 8:38:59 AM

The bears take advantage...

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- ETF Positions indicated as Green are Long ETF positions and those indicated as Red are short positions.

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Value Portfolio:

Long SDRL at $33.90 on June 15, 2012 (Shares were put to us when options expired. We were paid $1.10 per share when we sold those options and bought shares for $35.00 each.) We have collected dividends: June 10, 2014 $1.00, March 5, 2014 $0.98, December 3, 2013 $0.95, September 5, 2013 $0.91, June 5, 2013 $0.88, $1.70 Dec 4, 2012, $0.84 Sep 4, 2012. Total = $6.28 in dividend payments.
Short FXE at $124.19 on August 24, 2012
Long UUP at $22.43 on August 24, 2012
Short FXE at $134.48 on October 4, 2013
Long SDRL at $35.43 on Feb 18, 2014
Long SDRL at $33.50 on March 21, 2014 (Shares were put to us when options expired. We were paid $1.50 per share when we sold those options and bought the shares for $35.00 each.) We have collected dividends: June 10, 2014 $1.00.
Short GDX at $26.38 on July 3, 2014

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Equities gapped down at the open and moved down the rest of the morning, finally reversing during the lunch hour. The bounce erased some of the losses but the bears attacked again in the early afternoon that realized a higher low and the bulls bought during the final hour of trading to see the Dow and S&P-500 record fractional losses while the NASDAQ-100 lost more than one percent. Still all the major indexes closed above their 20-, 50-, and 200-Day Moving Averages (DMAs). In fact, only the Russell-2000 (IWM 116.34 -1.43), the Bank Index (KBE 33.17 -0.45), and the Regional Bank Index (KRE 40.14 -0.58) closed below their respective 20-DMAs, although the Finance Sector ETF (XLF 22.74 -0.20) did close even with its 20-DMA. The Dow Jones Transports (IYT 146.98 -0.16) posted a modest loss and the Semiconductor Index (SOX 642.63 -3.47) closed fractional lower. All equity indexes we regularly monitor are now in trading states. All maintain their BULLISH BIAS. Longer Term Bonds (TLT 112.74 +1.25) added more than one percent and was able to close back above its 20-, and 50-DMAs. It shifted to a trading state and maintains a NEUTRAL BIAS. Trading volume increased but remained light with 672M shares traded on the NYSE. Trading volume on the NASDAQ increased to above average with 2.157B shares traded.

There were two economic reports of interest released:
• JOLTS Job Openings (May) came in at 4.635M versus April's 4.464M
• Consumer Credit (May) came in at $19.6B versus an expected $19.3B
The first report was released a half hour into the session while the latter report came out with one hour remaining.

Earnings season unofficially kicks off with the release of earnings by Alcoa (AA 14.85 +0.11) after the close for the session this was written about. Alcoa beat expectations and the stock is trading up a couple percent in pre-market trading. It had been up as much as five percent after the earnings release. Alcoa reaffirmed their opinion that demand for aluminum will increase by seven percent in 2014 over the prior year. During the session, the bears preyed on nervousness to push prices lower. This will likely force some short covering early in the session as a beat by Alcoa puts the bears on the defensive.

Apple (AAPL 95.35 -0.62) posted a fractional loss after being down more than one percent intraday. It seems there is real strength in AAPL as it resisted the larger downward move by most tech stocks. AAPL constitutes about 20 percent of the NASDAQ-100 and nearly five percent of the S&P-500.

Seadrill Limited (SDRL 37.53 -2.07) lost five percent on news of a $1B convertible bond offering. It closed well below its 200-DMA and is, in fact, below its lower BB. Most of the damage was done at the open and it is now oversold. We believe it will come back and move back above its 200-DMA and is likely on its way to continue climbing much higher. The next target above remains $40.96, it's closing price on the last trading day of 2013. It is in an trading state. We sold March 2014 $35.00 put contracts for $150 at the open on Feb 18th, 2014 and bought shares at $35.43. The stock is now trading ex-dividend for $0.98 and one dollar for total dividends issued of $1.98. The shares were put to us at $35.00 less the $1.50 per share we were paid for the puts, so we have an effective price of $33.50.

The U.S. dollar and the Euro again were all but unchanged. The dollar continues to trade below its 200-DMA while the Euro failed to break up through its 200-DMA.

The yield for the 10-year treasuries fell five basis points to close at 2.57. The price of a barrel of crude oil fell thirteen cents to close at $103.40.

The implied volatility for the S&P-500 (VIX 11.98 +0.65) rose six percent. The implied volatility for the NASDAQ-100 (VXN 13.74 +1.30) rose ten percent.

Market internals were bearish. Decliners led advancers 3:2 on the NYSE and by 4:1 on the NASDAQ. Down volume led up volume better than 7:3 on the NYSE and by 7:1 on the NASDAQ. The index put/call ratio fell -0.60 to close at 0.75. The equity put/call ratio rose +0.02 to close at 0.63.


Conclusion/Commentary

Volume increased but was still light on the NYSE but above average on the NASDAQ. High beta stocks moved down more than lower beta names, as you would expect. Earnings season is a traditionally bullish period and Alcoa's earning release started things off nicely for the bulls. This might cause a short covering rally and we could see some equity indexes attempting to reach new highs in the not too distant future. Once again, the Dow and S&P-500 posted only fractional losses as many more volatily equity indexes posted losses of more than one percent. We covered our short position in Gold miners (GDX 26.46 +0.42) at the open at $26.32 for a six cent per share profit and will be looking again to short GDX in the near future. We will remain long equities to see if the bulls can put together a rally as many shorts may be forced to cover. If the bulls are unable to cause a rally, then we would consider closing some of our long positions in the near future.

 


We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.

 


 

Mark McMillan

Author: Mark McMillan

Mark McMillan
The McMillan Portfolio

Mark McMillan

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