From the Top

How Much Upside Is Really Left for Adobe Systems (ADBE)?

Predicted gains for ADBE may already be baked into the share price

by 6/30/2014 2:10 PM
Stocks quoted in this article:

I think a critical question with regard to what I am sure is the fundamental-based view on Adobe Systems Incorporated (NASDAQ:ADBE) -- as expressed in this Barron's piece -- is to be able to discern whether this "20% upside" is applicable to:

  • The current share price
  • The share price before all this subscription-based success was revealed

Unfortunately, analysts will regularly confuse these two concepts, so you have to make your own independent judgment as to how much of this stuff is already priced in.

For example, ADBE is currently trading just about 20% above its 40-week moving average, represented by the orange line on the first chart below. If you consider the 40-week to represent "all known information" about ADBE and its prospects before the most recent earnings (and the success of the subscription model), one could argue this 20% upside has now been fully priced in. Similarly, the +20% year-to-date (YTD) level is at $71.84 -- not far below ADBE's last sale -- and once again, we can play this hypothesis against the information priced into ADBE's price at year-end and conclude this upside is now "in there."

I think this puts even more emphasis on this +20% YTD level holding as a post-gap low, and so a move back below could be even more negative than I had been thinking. It's also not the biggest positive that the Barron's piece has had such a minor post-weekend effect (so far, anyway) -- seems like the stock was again looking to pull back to test +20% YTD before the weekend buyers kicked in.

The second chart below is a 30-minute bar, and my experience had once been that I wanted to look to enter from the long side after these low-volatility sideways moves following a big gap rally, and by so doing I have most often gotten burned. I would see this as especially of concern here if $71.84 is taken out.

Weekly Chart of ADBE since February 2012
30-Minute Chart of ADBE since June 10, 2014

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Gold and Silver Grapple with Round-Number Returns

GLD and SLV have struggled at the +10% year-to-date level

by 6/30/2014 10:20 AM
Stocks quoted in this article:

Both the SPDR Gold Trust (GLD) and iShares Silver Trust (SLV) have had trouble at different times this year with closing above the +10% year-to-date (YTD) level. Last Wednesday, these exchange-traded funds (ETFs) each experienced an intraday failure shy of +10% YTD, with gold coming the closest.

This might be of particular interest with recent talk of gold futures clearing resistance at $1,300 an ounce.

Year-to-Date Chart of GLD and SLV

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One Victim of the Market's Stagnation

Are VIX call buyers at risk of a knockout punch?

by 6/2/2014 9:49 AM
Stocks quoted in this article:

The following is a reprint of the market commentary from the June 2014 edition of The Option Advisor, published on May 22. For more information or to subscribe to The Option Advisor, click here.

The blue, green and orange lines on the accompanying chart might as well have been produced by a 6th grader asked to draw 3 lines of any shape (one in each color) across the page, with the only "rule" being that none should rise above the horizontal line labeled "+4%" nor fall below the horizontal line labeled "-6%." And then it turns out the student "made a mistake" in drawing the orange line by allowing it to wander too far downward early on.

Year-to-Date Daily Chart of DJI, SPY, and IWM

This explanation for what appears on this chart would actually have made a lot more sense to me at year-end 2013 than if you had instead told me it represented the year-to-date 2014 changes (as calculated daily on a closing basis, through May 22, 2014) relative to their 2013 closing prices for the two "headline" market benchmarks (the Dow Jones Industrial Average and the S&P 500 Index -- as represented by the SPDR S&P 500 Trust [SPY], its actively traded ETF) and the most widely followed measure of the price action of the smaller caps (the Russell 2000 Index -- as represented by the iShares Russell 2000 Index [IWM], its actively traded ETF). Because to have guessed that not a single one of these 3 instruments would have moved at any time over this period by more than 6% in either direction (except for one very brief period for one of the three) from its 2013 closing price, and that in late May all 3 would be trading within 3% of their 2013 closing price, would have defied credulity.

In fact, the only "credulity" to the way the 2014 stock market has played out so far is in itself highly ironic. Because when viewed in the proper context, this "lack of volatility" (actually more akin to "lack of a pulse") in the 2014 stock market appears to me to be the final nail in the coffin for those who had followed a strategy that had -- despite its innocent-sounding purpose -- attracted mania-like levels of participation from even the most sophisticated money managers and hedge funds. I think you've seen me refer to this as "the protection trade," for which call options on the CBOE Volatility Index (VIX) were the "weapon of choice" and whose objective was to protect against a crash in the stock market by betting on the sharp increases in volatility that so often accompany market plunges.

Not only did those who stick to this "hedging strategy" experience no market crashes, but market volatility -- with a few interruptions here and there -- proceeded to decline inexorably, thus causing the expiration of their various VIX call options to become a monthly rendezvous with death. And while open interest on the VIX call options is still huge (and some open interest records were set this year), VIX call volume appears to be drying up, as has the new money for this trade best described as "a solution looking for a problem."

Presumably, those managers who have now been deprived of their "VIX toys" and who were truly "bears disguised as fully invested bulls" have been expressing this view the "old fashioned way" -- by cutting back on their market exposure. And this activity has, I am sure, contributed to the supply every decent rally in the making has encountered in 2014.

But I believe the real knockout punch has yet to be delivered to those hedge fund-type bears who had decided to become "pretend bulls" by taking positions in "VIX hedges" until too much cash had been incinerated for almost anyone's constitution. The first blow came from volatility that refused to "pop." The final blow to those who can barely tolerate long positions in the market will come from a stock market that refuses to suffer a decent pullback -- until their opportunity cost for being under-invested will top even the money that was incinerated on VIX calls. And, yes, it will be at that point of maximum pain that it will, in fact, truly become time to consider "hedging volatility."


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Tracking Year-to-Date Returns for Stocks and Precious Metals

Why traders should keep an eye on the SPDR S&P 500 ETF Trust (SPY)

by 3/10/2014 9:18 AM
Stocks quoted in this article:

The following is a reprint of the market commentary from the March 2014 edition of The Option Advisor, published on Feb. 27. For more information or to subscribe to The Option Advisor, click here.

I've pointed out on many occasions in this space the importance of tracking year-to-date percentage changes for market indices, sectors, and individual stocks, as various levels of round-number gains (or losses) on a year-to-date basis have proven their value time and again as markers for support and resistance.

The first of our two accompanying charts (click to enlarge) compares the year-to-date performance of the Dow Jones Industrial Average (DJIA) with that for the 3 major index ETFs -- the SPDR S&P 500 ETF Trust (SPY), iShares Russell 2000 Index ETF (IWM), and PowerShares QQQ Trust (QQQ).

DJIA in 2014 with SPY, IWM, QQQ

Note how this cluster of barometers of the health of the U.S. stock market collectively failed to move convincingly into positive territory on a mild market rally in mid-January, which then set the market up for its unpleasant pullback into the end of the month.

But there was greater differentiation as this pullback played out, as only the DJIA fell significantly below the negative 5% mark, while the QQQ held at the negative 4% level. And this disparity has continued to play out on the subsequent rally, with the DJIA still ensconced in negative year-to-date territory, QQQ and IWM now a couple of percentage points to the good, and SPY (representing the largest-cap names) now moving into a positive year-to-date position this week for the first time this year.

I'd suggest you pay particular attention to the year-to-date levels for SPY and the associated S&P 500 Index (SPX) in the days and weeks ahead, because if this week's breakout into positive year-to-date territory is "for real," we could see some significant upside follow-through, with perhaps a quick 10% rally for "openers." But if the move by the S&P into the "green" for 2014 is short-lived and soon rejected, the subsequent pullback could be sharp and scary. (SPY closed 2013 at $184.69; SPX at 1,848.36 -- you can compare their current values to these benchmarks to determine if they are positive or negative for 2014.)

While the year-to-date picture for the U.S. equity market is one of struggle and resistance, our second year-to-date chart (click to enlarge) presents quite the opposite picture for the precious metals ETFs -- the Market Vectors Gold Miners ETF (GDX), SPDR Gold Trust ETF (GLD), and iShares Silver Trust (SLV).

GLD has never been in negative territory on a closing basis in 2014, though it struggled for the past week or so before it took out the +10% level. And note the support at the zero line that emerged for SLV on its late-January pullback, with the subsequent rally then breaking through +10% before weakening. But I find the remarkably strong GDX action (representing the gold mining shares) to be most instructive of all -- first supported at the zero line just after the first of the year, then a struggle at the +10% year-to-date level, and finally a sharp rally that first hurdled a speed bump at +20% and then another at +25% before GDX settled into its current position of bouncing between the +20% and +25% year-to-date levels.

DJIA in 2014 with GDX, GLD, SLV

Those who trade these precious metals ETFs should be keeping a close watch on the ongoing battle by GLD and SLV to hurdle the +10% year-to-date line once and for all, as success or failure at +10% could prove a major indicator for whether the remarkable 2014 gains across this sector will undergo a further build, or whether consolidation is in order.


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Why I'm Watching XIV at $30

Two ways today's pullback in the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) could play out

by 3/3/2014 12:28 PM
Stocks quoted in this article:

The VelocityShares Daily Inverse VIX Short-Term ETN (XIV) dipped to about a point below the key $30 level earlier this morning before beach-balling back above by a few pennies. Meanwhile, today's volume is running about three times the normal level.

XIV pullbacks on big volume to round-number levels have been good market-bottom indicators over the past couple of years. Even better has been when the ETN's 14-day Relative Strength Index (RSI) was touching 30.

In January, there was a "fake out" hold at $30 and then a final plunge in early February to just below $26. The big volume was there for a hold at $30, but the 14-day RSI was still well off 30, and it took that final XIV plunge for the RSI to get there.

The current situation can go either of these two ways. One possibility could be that $30 holds by the end of today and volume remains high, and the pullback (in both XIV and the broader equities market) is over. The fact that this was a geopolitical-based pullback on a Monday morning after an expiration could add up to a situation ripe for semi-panic lows being in place not long after the opening -- in other words, just a storm passing through.

Mitigating against the XIV-bottom argument is the fact that the market is coming off multiple tests of the usual resistance (the recent action of the S&P 500 relative to 1,850 and its 0% year-to-date level was not too different from that in January, before the pullback), and one could argue it's questionable for a pullback to be completed in one morning under those circumstances. Perhaps related to this is the current XIV 14-day RSI level of 42, which could set up a need (assuming $30 is broken) for a test of last month's XIV lows before XIV is sufficiently oversold to strongly indicate a bottom.

I think a lot may be riding on whether XIV can hold above $30 -- today and in the days immediately ahead.

XIV 30 and RSI 30

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  • Founder and CEO of Schaeffer’s Investment Research, Inc. and Senior Editor of the Option Advisor newsletter since 1981
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