To the Risky Go the Spoils (IBB, MSFT, INTC)

A number of you have written or called recently regarding our open pairs trade of June 16th, that matched tech giants Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC).

The reason for your worry, apparently, was that Intel bucked our initial negative assessment, continuing to rise even as we claimed that her top was already in. And there, we can make no argument. A fact is a fact and a rise is a rise.

But we have to add that MSFT, too, has risen beyond our initial prognostications, meaning the (paper) loss on the trade is still minimal, and judging by the relative technical merits of the two, we believe it’s premature to initiate any kind of repair on the trade or to close it down altogether, as some have suggested.

A look at the two charts will explain our thinking.

Here’s Intel for the last six months, to begin –

intc

The strength in the stock is apparent. But after a better than 50% rise over the last half year that was punctuated by two gaps on strong volume, we believe the shares are now vulnerable. That is, it would surprise us in the extreme if the move still had any significant strength left, especially given a wildly overbought condition that’s persisted for the last six-weeks.

To put it in different terms: that Intel will continue to outperform MSFT stock over the near- and intermediate-term is a highly questionable proposition.

A look at Microsoft’s chart helps explain why –

msft

MSFT’s stock has risen far less dramatically than Intel over the last six months, climbing some 18% without fanfare or gaps. She’s also done so without getting overly extended from her long term moving average (in yellow), above which she’s currently trending some 28% (as opposed to Intel’s ludicrous 42%).

Microsoft’s latest surge, however, has also brought her into contact with the overbought RSI 80 level for the first time in fifteen months, a development that certainly casts a technical pall over her shares for the time being.

So the news is bad?

 

We don’t think so.

Our assessment of the two stocks is based on the relative merits of each, as determined by the technical indications that we’ve presented above.

And those indications tell us that while the two are overbought – one dramatically and one only marginally – we believe that the market will assess each stock’s relative merits and respond accordingly. That is to say, we expect that the selling that will come to grip the two companies shares in the weeks ahead will be much worse for Intel than it will be for Microsoft.

As for the options themselves, yes, we’re currently in a losing position as of last Friday’s close, but not overwhelmingly so.

The Numbers

Our long MSFT 44 CALL is now trading for $1.71, while the short INTC 31 CALL changes hands for $2.88. That’s a loss of $1.17 on the trade thus far – but again, we see it as temporary and believe a turn lower for INTC is imminent. We’re willing to hold the trade here for another week (at least) and give time for the technical setup to develop more in our favor. And we’ll certainly speak again to the trade next Monday.

Moving on – the Bad News Bull

 

We continue to marvel at the resilience of this bull market through news bad and worse, geopolitical and financial. Not only are we continuing to see new highs from all the major indexes, but the average investor is still refusing to climb on board the equity train.

And that’s a positive development.

Consider: late last week the American Association of Individual Investors (AAII) canvassed less than one third of its members in the bullish column, despite the fact that the Dow struck new highs during the course of the week and both the NASDAQ and S&P 500 are less than a percent off their all-time highs.

Look here –

bullish

What’s going on, friends? Where’s the excitement? Where’s the passion? Where’s the cash?

When, in short, will Joe Websurf pony up and get in on the action? This is a bull market, baby!

And the question is not rhetorical.

The answer is clear – the small time investor will jump into the pool only when the jig is up, when the final, all-consuming blow-off top is upon us and the rise goes parabolic.

And that’s precisely when the fat cats will be dumping, and when we, too, hope to make our exit.

But we’re still a ways away from that point. The above chart is proof, pure and simple that the wall of worry is in tact. The bull market lives. And the end is not yet nigh.

Nailbiting on Wall Street

 

The truth is, the above-mentioned worry is not exclusive to Main Street. Wall Street, too, is packed today with anxious folk who, according to a recent Bloomberg survey, also fear an end to the bull.

A full 47% of financial professionals polled said, “the equity market is close to unsustainable levels,” while another 14% believe we’re already in a bubble. They cite any number of indicators, including the biotech sector trading at 500x earnings and the explosion in junk bond issuance, to support their contention.

But all that matters to us is their fear.

In a bull market, there simply ain’t nothing like it.

Risk is Oxygen; Value is a Noose

 

We say the current bout of fear won’t last. Maybe during earnings season, maybe just after, the fog will lift, and investors will return to the fold seeking the riskiest investments they can find, because that’s precisely where the greatest alpha will be generated.

boldest

For this reason, we turn precisely now to the aforementioned biotech sector, whose shares fell ominously earlier in the year, after an abnormal run-up, and whom we believe will be among the most volatile sectors going forward.

Take a look here at the iShares NASDAQ Biotechnology ETF (NASDAQ:IBB) –

ibb

The picture here is of a stock that ran away and retraced significantly (25%) on tremendous volume. That volume would indicate that the bottom for IBB is in and a return to bullishness is now at hand.

The only item that muddies the picture is an overbought RSI read (in black) that warns of near term weakness.

Our take, though, is for strong moves – of whatever variety – in IBB stock over the intermediate term.

And we’ve developed our strategy accordingly.

Wall Street Elite recommends the following trade for your consideration – buy the IBB August 230 PUT for $3.50 and sell the August 225 PUT for $1.85 for a debit of $1.65. Also buy the IBB September 275 CALL for $2.00 and sell the September 285 CALL for $0.55, for a debit of $1.45. Total debit on the trade is $3.10.

We’ll be angling to maximize our take by trading both spreads before expiry.

With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

See what people are saying...

  1. bill keathley

    you play on msft and intc is looking even worse today

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