Skip to main content

Morning Update

Yesterday’ trading session was extremely whippy as comments and rumors out of Capital Hill pushed markets first deep into the red and then back to unchanged on the day on extremely light volumes. Some of the most interesting price action was in the VIX. The index traded to nearly 21 when stocks were at their low, and the futures went into slight backwardation. Backwardation is when the near month future is more expensive than the back month and signals extreme market anxiety. However as soon as news broke that the House would reconvene Sunday night in Washington stocks took off and the VIX sold off to close on the lows of the day. In these low volume markets it does not take much to get major market moves and reversals like we saw yesterday. Today Obama is scheduled to meet with Congressional leaders and I expect the market to hang on their every word.

Yesterday’s retails sales data was weaker than expected, which prompted a selloff in retail stocks. However one option trader was buying calls on the weakness in Michael Kors. The trade was the purchase of 870 Jan. 55 calls for $0.55 with the stock at 48.80. This trade will profit if KORS is above 55.55, 13.8% higher, at January expiration.

Michael Kors has been a public company for just over one year and is up over 80% in that time. Despite the run up in its shares the company was added to Goldman’s conviction buy list last week and remains a strong buy at Citi. The reason is expectations of strong growth in Q1 and Q2 of 2013. Growth is expected to be driven by very selective discounting, increasing jewelry sales, and increasing brand awareness in North America. However, the stock faces some risks, such as slowing department store traffic and potentially higher taxes on target market due to the fiscal cliff. But KORS is well positioned to weather these risks. By having minimal exposure to Asian and European markets the company is not subject to the slowing economies overseas. Also, by offering upscale products that are more affordable than the highest end designers like Prada and Louise Vuitton its products are seen as an affordable luxury among consumers. Within North America KORS has plenty of room to grow and the brand continues to gain consumer awareness due to the appearance of Michael Kors himself on Project Runway.

Further growth in this stock will be driven by continued earnings growth. The stock is trading at 40 times trailing earnings, which shows traders are betting heavily that these sales will continue their dramatic increase. KORS is positioned to do better than many US retailers in Q1 of 2013 but growth rates could slow if the US goes off the fiscal cliff or economic growth stagnates. Because of the stock’s high PE ratio I would only play this stock with out of the money calls in order to keep downside risk as limited as possible. KORS bounced off of its 200-day moving average yesterday and I think buying into the weakness with the stock at this support level makes sense.

Comments

Popular posts from this blog

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…

The market should take Trump seriously this time.

Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska.  North Korea has made it very clear that their intention is to grow their nuclear capability to be able to reach the Continental United States.  This would destabilize the region, and world overnight.
Now I don’t expect the war drum beating will spill over into mortar shells raining down on Seoul anytime soon.  There has been a choreographed diplomatic dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with help from China).  North Korea gives up their acting out activity (promises they won’t do it again), a North Korean South Korean gesture of goodwill takes place, such as joint Olympic teams, joint economic projects, North Korea gets to declare victory.
However, this go around seems slightly different.  Now we have a President who has made it very clear in his campaign tha…