Apple

NYSE volume was 20% above yesterday's and S&P 500 e-mini futures (ES) volume surged to its 2nd highest of the year as the last 30 minutes saw heavy volume and large average trade size very active as it pushed up towards VWAP and oscillated around its 50DMA. ES closed below its 50DMA for the first time since Monday but equities notably underperformed Treasuries (playing catch-up to bond's recent rally). Equities hit their lows at around 1430ET as ES coincided with Monday's closing VWAP (and Apple also tested and stayed around Monday's closing VWAP) and with a spike down and recovery in WTI prices (margin calls?). The major financials saw their best levels pre-open and slid lower all day with very little bounce at the close. While there was plenty of volatility in FX and commodity markets, close-to-close changes were relatively benign in the USD (DXY) and Oil, Copper, and Gold (while Silver modestly outperformed). All the action in FX was between US open and Europe's close but the afternoon saw AUD drifting weaker and CAD lose most of its spike gains from yesterday as JPY also slipped relative to the USD reducing some of the negative carry impact. Just as we had noted, and reiterated this morning and afternoon, equities performed the same hope-driven rally relative to broad risk assets as last week, and before the late day VWAP-seeking surge, almost completed their shift to fair-value. VIX also pulled higher to its credit-equity-implied fair-value before falling back as we rallied into the close. Overall average trade size today in ES, given its very heavy volume, was among the lowest of the year which suggests a lot of algos trying to wriggle their way back to VWAP to release some orders and with equity reverting to Treasury's, credit's, and broad-risk-asset's views of the less-than-stellar world, we suspect there is more selling to come here - albeit with OPEX complications.

The Apple trade works until it doesn't. The exit door may get quite crowded!

Four of the last five days have seen AAPL stock price swing +/- 3 sigma with today's drop approaching the largest drop in six months as rumors of iPhone sales weakness spread virally. Realized volatility is exploding on many different measures and AAPL implied volatility back to November highs. Of course as tensions mounts and the stock breaks Monday's closing VWAP, so margin calls on options expiring tomorrow are flopping over into various other markets as S&P 500 e-mini futures drop back below their 50DMA and VIX jumps up over 19.5% once again. Gold has pulled back in line with the USD and while the S&P 500 flip-flopped between bullishly synced with the USD and bearishly synced with Treasuries, for now equities in general are trying to catch up to longer-term Treasury weakness.

Look at the big picture. 

One of the great existential debates about U.S. equities is essentially demographic in nature.  Nic Colas, of ConvergEx, asks the question, will retiring Baby Boomers cash out of stocks in the coming years, leaving lower valuations in their wake?  At least one recent Fed paper pointed to an 8x earnings multiple for stocks – down from 14x currently – in 2025, all due to the changing face (and age) of the typical investor.  But all this doom and gloom only fits if every generation has a similar risk tolerance.  If younger cohorts – dubbed Generation X and “Next” – have higher risk thresholds, they may actually buy more equities than their parents, alleviating the demographic time bomb behind that dire Fed prediction.  Getting a fix on how these nascent investors will evaluate the risk-return tradeoff is tough; they still don’t have much money to put to work.  Still, some signs exist.  Believe it or not, a third of young Americans have tattoos, an acknowledged sign of risk-loving behavior.  And if you think that is just bad decision-making, consider the business rock-stars of the under-30 set.  This latest wave of billionaires are all outsized risk takers, and role models to their generation.  Stocks may not be dead just yet.

NASDAQ managed its largest gain in four months as Apple came back into vogue and saved the day. The equity indices were alone in their magnificent exuberance after the European close as Gold, Treasuries, and the USD all tracked sideways in a very narrow range. As we have been warning, the mania is back in equity (and credit markets but less so) as April has now seen six of the last nine days swinging between 2 sigma gains and 2 sigma losses (for the NASDAQ). Volume was average today in ES (the S&P 500 e-mini futures) and NYSE (stocks) but high in Apple's equity and options markets as the schizophrenic behavior pushed the stock from under $572 at the open to almost $610 by the close (though notably stuck between Friday's close $605.19 and its closing VWAP at $610.74). The last day to fund your IRA combined with tomorrow's VIX futures/options expiration likely helped some of this momentum (as we note VIX is about 1 vol higher than it was when the S&P closed at these levels on Friday). Just as in Europe, credit markets were simply not as enamored with the Spanish auction or Apple's awesomeness as equities and drifted sideways to weaker all afternoon (with some late-day weakness in HYG as it starts to fall back towards its NAV). Financials and Materials lost some ground into the close and ES gave all its post-Europe-close gains back as volume and trade size picked up significantly at last Thursday's swing highs (near pre-NFP levels again). The Treasury complex saw all its 'losses' in the early going and went sideways in an extremely narrow range for much of the US day session - ending the day slightly higher in yield (0.5-1.5bps) on the week. Commodities surged early on as the USD slipped but drifted back from mid-morning on (except WTI which broke above $105 (ended above $104) for the first time in 2 weeks. Gold and Silver nose-dived right after the US open only to recover it all by the European close. EUR strength (and USD weakness) occurred early this morning on the Spanish auction and aside from a rip in CAD the rest of the day was relatively tight ranges with a very small drift higher in DXY. All-in-all, it seemed like an oversold snap that saw opportunistic sellers coming in at the end as average trade size surged and ES closed back above its 50DMA again - echoing last week's mania and worryingly raising realized vol for all those hopes and dreamers. Equities look over-their-skis again relative to risk assets in general.

Just as with the broad market, Apple is showing the schizophrenic signs of a market caught between two increasingly distinct Known Unknown scenarios. From down over three-standard deviations (most in 6 months) to up over two standard-deviations (most in 3 months) - even as implied vols remain elevated (as realized vol starts to pick up once again), Apple manages to deny gravity (for a day so far) as it has its best up day in over a month.

• This is just hilarious on so many levels: Japan Will Provide $60 Billion to Expand IMF’s Resources (Bloomberg) - just don't look at Fukushima, don't look at the zero nuclear plants working, don't look at the recent trade deficit, and certainly don't look at the Y1 quadrillion in debt...
• US Senate vote blocks ‘Buffett rule’ (FT)
• Reserve Bank of Australia awaiting new data before considering rate move (Herald Sun)
• Merkel Offers Spain No Respite as Debt Cuts Seen As Key (Bloomberg)
• RBI cuts repo rate by 50 bps; sees little room for more (Reuters)
• China allows banks to short sell dollars (Reuters)
• Central bankers snub euro assets (FT)
• Shanghai Econ Weakening’ Mayor Vows to Pop Housing Bubble (Forbes)
• Wen's visit to boost China-Europe ties (China Daily)
• Madrid threatens to intervene in regions (FT)

All you need to read and more.

Amid the fourth heaviest volume of the year, Apple shares fell over 4% today - its largest single-day drop in six months (and largest two-day drop in 23 months) and GOOG also fell over 3%. This dragged the NASDAQ down but the S&P 500 (which was implicitly hurt by this major underperformance) managed to survive with relatively minimal damage close-to-close as the EUR repatriation drove TSY yields up and the USD down with correlations doing the rest to support stocks. Heavier volume and trade size came in as ES (the S&P 500 e-mini future) slid notably into the close though - almost 10pts off its afternoon highs and over 1% off its day-session opening levels (which were the highs). USD weakness accelerated rapidly after the European close - quite evenly distributed across all the majors but EUR weighed heavily as it retraced most of Friday's losses. The USD selling stopped around 130pm ET. The USD weakness supported some recovery from early weakness in commodities but the second largest compression in Brent-WTI in 16 months to around $15 - led by Brent more than WTI - on the Seaway reversal date being brought forward, was the biggest news in commodities. Silver ended unch and gold down modestly. Credit outperformed stocks on the day (and from open-to-close) but this seems as much credit-equity index arb as credit remains notably weaker. HYG stayed in sync with SPY today after we first noted the convergence on Friday (following the April asset allocation shift). After rallying early, Treasuries stabilized through the USD selling frenzy immediately post-European close but as the USD stabilized in the late afternoon (and AUD weakened) so Treasuries were oddly sold off (along with stocks) ending the day basically unchanged (after being lower by 4-5bps before the US open). VIX closed unchanged after opening lower and pushing to well over 20% at its worst - as 19% seemed to support it as we rallied in the afternoon. ES tested above its 50DMA once again and closed back below it on a relatively heavy day with very low average trade size.

All you need to read and some more.

My most recent trip to Calgary gave me a welcome chance to catch up with friends and colleagues in Cow Town's oil and gas sector. I found out about new projects, investigated companies of interest, and came away with an improved feel for the current state of affairs – what's hot, what's not, and why. The outlook from here is not great. When markets turn bearish, investment strategies often turn toward income stocks, and rightly so: if market malaise is expected to keep share prices in check, dividends become a very good place to look for profits. But whenever a particular characteristic – such as a good dividend yield – becomes desirable, it also becomes dangerous. The sad truth is that scammers and profiteers jump aboard the bandwagon and start making offers that seem too good to refuse. It was just such an offer that reminded me of this danger. In the question-and-answer period following my talk in Calgary at the Cambridge House Resource Conference, an audience member asked my opinion of a new, private company that was offering a 14.7% monthly dividend yield.

The headlines flow in:

• GOOGLE 1Q REVENUE $10.65B
• GOOGLE 1Q REVENUE EX TAC $8.14B, EST. $8.14B
• GOOGLE 1Q ADJ. EPS $10.08, EST. $9.64
• GOOGLE 1Q PAID CLICKS ROSE 39% VS YEAR AGO
• GOOGLE 1Q TRAFFIC ACQUISITION COSTS $2.51B
• GOOGLE 1Q COST PER CLICK DOWN 12%

While 'Apple is the market and the market is Apple' has been the mantra for much of the last few weeks, the last few days suggest a regime change. Apple is currrently trading down three days in a row (which is unusual in itself), having dropped the most in these three days since the middle of December. However, unlike the previous times when Apple dropped, the S&P 500 is ignoring it for two days in a row - something that has not occurred since mid-January and the largest divergence with Apple down 1.2% and the S&P 500 up over 2.1%. Are the professionals using the gap-fill market pump to sell into strength?

The Apple trade, it works very well... util it doesn't. What happens when ALL of those funds change course???