Monday, April 19, 2010

Morning Observations From the Doc

* As we can see, financial stocks (XLF) broke out to bull market highs in March, only to pull back sharply on very expanded volume on Friday. The catalyst, of course, was the GS news and subsequent selling of bank stocks. Much discussion has focused on whether this will lead us to a sustained correction after a remarkably consistent run up. Less commented upon is the fact that SPY volume more than doubled on Friday from its recent average levels and the daily price range did the same. The GS news has pulled in more institutional participants who, to that point, had found no reason to sell a market that showed rising earnings in a low interest rate, accomodative monetary environment. It's as much a potential shift in volatility regimes as in directional trade;

* Overheard from one savvy trader: "What are the good financial stocks that are getting punished along with the banks?" Sometimes asking the right questions is half the battle. Figuring out how to express the answer to the question is a big part of the other half;

* From a recent email I sent to a sharp trader buddy: "Algos cannot change whether stocks go from point A to point B, but they do influence the path. The more path dependent the trader, the more vulnerable he is."

* I was looking at real estate in the northeast this weekend. No question that activity has picked up. Particularly vulnerable, however, was the luxury condo market: plenty of developments sitting only partially filled, with price declines failing to bring people in. And that's one of the better real estate environments. Miami has over 14,000 housing units for sale, over 8000 of which are condos. To cover costs, condo owners/developers have to rent their units out and that gives little incentive for buyers to step up and risk owning property in failing developments. And how about tenants who bought early and now face a glutted market should they need to sell? Just too much tail risk for buyers, and that has to impact the trajectory of the housing recovery at the high end.

* "A pessimist sees the difficulty in every opportunity. An optimist sees the opportunity in every difficulty." - Sir Winston Churchill