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Is The Steel Sector A Steal: Industry Analysis (NUE, AKS, X) 11.30.2012

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The steel sector is a function of economic activity and tall operating leverage. Traditional steel is also a capital-intensive sector, given the former one can expect to not pay up for EBITDA. Furthermore, United States steel mills usually have lower cost curves. This is indicative of NUE. Nucor has historically been the producer of low cost with their mini mills and prime acquisition of scrap; this has set them apart from the competition for many years. To that point, NUE has as paid out lots of cash to shareholders via, dividends, special dividends, and buy-backs. Other capital allocation has gone into many acquisitions of smaller firms, or to vertically integrate NUE, so it is run well, no matter the environment.

NUE has been doing the best out of its peers, in terms of price performance, which can be attributed to the above. The environment is not easy however, Chinese froth is difficult to cut through, the economy is stagnant regardless of the zero interest rate policy, and the whole market seems to be gunning for NUE’s margins. NUE is arguably the best-run steel stock.

Jefferies and Bank of America both point out that NUE is the target of short-term traders as a hedge against more aggressive longs. This confirms the quality investment thesis, because NUE has conservative balance sheet, high credit rating, product diversification, and lower implied volatility.

While still on the topic of quality fundamentals leading to outperformance, under the leadership of CEO Dan DiMicco, NUE is up a cool 370% since he took over in September of 2000, while the SPX is unchanged to lower. Dan DiMicco plans to leave NUE at the end of 2012.

Contrary to all of the positives…management and overall executives, own less than 1% of the shares, which is disappointing and not a good indicator. Furthermore NUE has not paid a major special dividend since 2008, the risk is that they continue not generate enough cash in order to be comfortable to do said programs again. A risk to being conservative is being left behind, or the opportunity cost to being more leveraged, however their current position seems to be better than everyone else as of now.

As indicated in the below graph when NUE is compared to the SPX(grey) AKS(blue), X(pink), SLX steel ETF(purple). The chart indicated that NUE(green and red) outperforms their peers, market, and sector ETF. NUE would be up more but dividend returns are not included.

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mark@keeneonthemarket.com

Steel

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Time of the Year to Get Bearish? (SPX, OIL, USD) 11.26.2012

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KOTM appropriately pointed out that AAPL’s range, on that day, was 1.5 standard deviations away from the mean…indicating a powerful and unusual hammer for AAPL and subsequently the NDX…thus the SPX and the market. This move preceded a four-sigma day for AAPL.  With all this bullish action however, has this recent bo=unce lasted too long and is it time to get short? 

The US Dollar index has nice horizontal support from 11/2/12’s open. This day was a massive bull day for the USD index; the formerly mentioned day could prove to be support for the SPX bears. USD bullishness is supported by a rounded bottom and up trending 50-day moving average. Other futures chars, like crude oil, have similar patterns. Oil is also at the recent top if its trend channel, and its respective complication of moving averages are directly above it. Away from the technical prospective, there are also fundamental reasons the bears will tout about.

           

If there is one thing the mainstream media has covered and talked endlessly about, it has been the looming fiscal cliff. Fidelity cites that, “up to $600 billion of expiring tax cuts, new taxes, and automatic spending cuts are set to take effect at the end of 2012 or beginning of 2013. If they hit all at once, the impact could amount to as much as 4%-5% of GDP.” This could be a serious event for the market if the government does not deal with it appropriately.

 

History, however, is on the side of the bulls. The last week in November has been bullish historically on average, the mean being up 3.1% since 2003. This conflicts with other research KOTM has done. The average cyu.ber Monday, since 2003, has been down nearly 1% for the SPX and -0.8% for the NDX, but this is just one day and perhaps not an indicator for the whole week. Either way, the recently formed channel will be one more thing to watch.

 

Screen shot 2012-11-25 at 11.41.14 PM

 

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 mark@keeneonthemarket.com

 

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Black Friday Myths & Returns (SPX, NDX, AAPL, NKE, SKS, and TGT) 11.21.2012

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Given that the index products were slightly negative and AAPL/SKS were positive, one could potentially put on a pair trade. The statistic below the average is the R^2, this would be a key indicator for a pair trade

Screen shot 2012-11-21 at 11.46.53 AM

R-squared is a statistical tool used to measure the degree of correlation between two items. Correlation analysis allows investors to make predictions about an asset by looking at how it reacts with other market variables. Specifically, the number R^2, is used as a metric to measure how well outcomes can be predicted. Zero being weak and 1 being extremely strong.

This relates to pair trading. A trade like selling NDX and buying AAPL could hope for a weak R-squared…meaning, historically and statistically, the two products can move different ways…thus having the potential to have the short (NDX) down and AAPL (long) up (as they have proven on average historically)…or the opposite…for Mark Twain reminds us that there are, “Lies, damned lies, and statistics.” Statistics can be used to support a weak thesis.

Option volatility trades can also be made from this data.

If one was inclined to, the data suggests that the SPX, NDX, NKE, and TGT products do not move that much…so selling iron condors could be a potential trade. Either way, the data is interesting.

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mark@keeneonthemarket.com

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Pullback or Breakdown? (SPX, DJUSMT, DJUSRR) 10.12.2012

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But alas, the bounce was short lived and the SPX closed just above the open, eking out a negligible gain, and printing a massive candlewick. While some short-term bullish action may be gone, is there still a chance for a bounce or do we breakdown from here?

Since June of this year, the market, SPX, has been in a beautiful channel, trending and fading from one side to another, finding logical support and resistance. Depending on your views, many traders view angled trend lines as major support levels. However, horizontal support, according to some, trumps angled support any day. But perhaps should the two prevail at the same time, one could argue that this occurrence is a powerful support level. The chart below displays such a level, as we have recently sifted across the channel into the horizontal and lower channel trend line; and additionally the 50-day moving average

While this one chart is well and good, under the hood some key indices have the majority of their moving averages above them. See chart below.

Key:

Dow Jones US Trucking Index

Dow Jones US Industrial Transportation Index

Dow Jones US Railroads Index

Dow Jones US Marine Transportation Index.

50 DMA yellow

100 DMA blue

150 DMA purple

200 DMA gray

Perhaps it can be implied that one should move along with caution, for many of the transportation indices seem to have pulled back and according to Dow theory…this is not a good sign.

SPXChart

DJUSTK

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Author mark@keeneonthemarket.com

Data from Thinkorswim

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Did the Options Market Get Too Bearish? (SPY SPX) 10.11.2012

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As the SPY comes into its 50 day moving average, what is the implied volatility saying in the derivatives market and is that a ‘tell’ we may be going lower.

The S&P 500 future is now $40 away from its October 5th high. Implied volatility (a measure of risk, supply and demand, relative price, and an input into theoretical models) in the October monthly options rallied up from 12.76% to the current 16.22%, or about 3.46 percentage points. IV (implied volatility), given the pump up because of the sell off, this increased premium traders can work with, but also changed the recent trading environment.

The previous example in the SPY is a natural go-to guy for many reasons. SPY is super liquid and represents the S&P 500 index. This ETF does have a setback…skew. Skew is a phenomena in major products that is a result of large selling of OTM (out of the money) calls and buying of OTM puts. While this may seem strange it is completely natural for large institutional holders with systematic risk, or market risk.

The data below displays the relative price of 5% OTM puts and calls in October with 8 or 9 days til expiration. The point is that the most recent observation is relatively expensive, or you get the most bang for your buck by selling OTM puts and buying OTM calls in a ratio. The puts premium being taken in and using that to buy calls.

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mark@keeneonthemarket.com

Data courtesy of Thinkorswim

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Halftime Report 9.4.2012

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This index printed 49.6 below the important 50; which is significant for it represents expansionary economic conditions.  CAT’s dramatic move could also be attributed to the construction spending data that came out today too.  This economic indicator printed a -0.9% month over month decline.  The broader XLI industrial etf is weaker by 1.4%; top holdings include GE (12%), UPS (5.5%), and UTX (5.24%) among others.

On the positive side BIDU is up about 2.8% today; however the search giant had a rough August…for it was down nearly 9% as sellers stepped in. BIDU, the largest Chinese search provider by revenue, is currently above the intraday high of  8/30/12 and may be looking to retrace some of the August 29th sell-off.

NFLX dropped like a rock in the first 15 minutes of the trading day, but has since rallied back to down 7% on the day. News of AMZN and Epix getting together for a streaming deal is the reason behind today’s fall. 

Earnings tonight include FRAN, GWRE, AVAV, FNSR, and TEA. Earnings before the open tomorrow include DG, HRB, PAY, NAV, and MW.

mark@keeneonthemarket.com

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Why Me Might Correct in September 8.23.2012

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Although it appears that we are in a strong bullish trend, I feel that sentiment is on the edge. The S&P needs the smallest excuse to tilt in the bearish direction, and it could tear lower. I would not place a bullish bet on this index.

PutsandCalls

David Cornes holds a degree in economics from the University of Montana.

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