May 11th close targets kind of reached.
For quite awhile, I have argued that May 11th closing prices made sense. It reflects worsening economic data and captures the initial shock of the JPM announcement, but not all the overhyped selling, and was back when Grexit was an option, but not the most likely.
S&P was 1,353 and is 1,358 right now. Nasdaq composite was 2,934 and is 2,929 right now.
JPM on the other hand closed that day at almost 37 and is still just about 35.25, so potentially has room to run. Looking at JPM alone I’m off on my idea as it has underperformed this move. My inclination is to leave it on as the testimony goes on.
HYG was 90.81 the day after JPM’s infamous call and is only back to 89.70, which given that it has made one dividend payment is reasonably caught up. The chase for yield is alive and well, and every downdraft is met by buying on belief that the U.S., which is more important to the high yield market, will do okay. The fact that whether or not we get some version of QE, the Fed isn’t raising rates any time soon so that also helps high yield. Once again I think the “beta” move is out and specific credit selection (or manager selection is key).
On the other hand, I wouldn’t have guess that we could see these levels with the Spanish 5 year bond yielding 6.38% for all the wrong reasons. Either the details of the bailout will come out and other ECB plans causing these bonds to catch a bid, or we face serious disappointment and stocks quickly head back to 1,300. Liquidity in Spanish debt is incredibly low and there never appear to be buyers or alternatively no sellers, so a big gap tighter is a real possibility and is my more likely scenario as so much of what I have read about the Spanish bailout has seemed too negative, yet, delaying the audit results and no details 10 days after the announcement are real causes of concern.
IG18 is another cause for concern. It closed on May 10th at 102.75, and gapped out to 108.5 on the 11th. The Monday saw it hit 114.5 and it is still at 116 so pretty far away from those May 11th levels. Part of this weakness is a function of treasuries having done so well and investment grade minimum yield targets making it hard for IG bonds to keep up, but is a concern.
I remain torn. Puts do look cheap. S&P 1310 June 29th puts were at 22 last Wednesday with all the fear of a Greek election and lack of excitement over the Spanish bank bailout, and now they are under 4. Are those worth a shot? Normally I prefer to be long or short things and options generally seem to waste money, but I think the risk to the downside is at least as great as it was last week.
For now I will watch JPM, look for further momentum there, and am still of the view that policy makers won’t disappoint (for a change), but we are now back at levels where the downside is balanced with the upside, if not potentially far larger.