Bats Swings and Misses on IPO

Dennis Dick and Joel Elconin of Premarketinfo.com discuss the BATS IPO today.  Chart courtesy of Nanex.net.

S&P 500 Index and Big 10 Weekly Outlook

What a week for Federal Reserve Chairman, Jamie Dimon, I mean Ben Bernanke. With the premature release of the most recent Stress Test results, another leg of this overextended bull market was unleashed. As investors and funds managers identified another sector besides technology, (or should I say AAPL), to park idle funds. As a result, Bank of America (NYSE: BAC) is nearly a double-digit stock once again.

After clearing the former high of the move (1371.50) on Tuesday, the S&P 500 Index never looked back, reaching 1400.50 (yes, another new handle) during Friday’s docile triple witch expiration and peeling back ever so slightly to close at 1398.50. So what is next, dare I say 1425.00, a level that was last visited in January of 2008? And as long as the index stays above 1384.25, there is no reason to put in any protective sell-stops. Warning, whenever I get this bullish, a top is on the horizon.

Well I could not have been more wrong about Exxon-Mobil (NYSE:XOM). After predicting last week a breach of the 84.00 level. XOM turned on a dime Monday, put a double bottom in place and headed north. However, instead of making a new 52 week high (88.13), or even a high for the move for that matter, it stalled just shy of 87.00. In fact, it approached that level in three of the five trading sessions and was rebuffed by High Frequency Traders leaning on the institutional size at 87.00. Perhaps the bull market can drag XOM along, through 87.00 to test the recent high (87.93) and the 52 week high. As long as 84.00 holds, this is the most likely scenario for XOM over the next few weeks.

Nearly another 50 point week for AAPL (NASDAQ:AAPL), so what else is new? After busting out of last Friday’s miniscule four point range on two gap and go’s (Tuesday and Wednesday), 600.00 was on the radar. And it did get there (barely), topping out at 600.01 on Thursday before settling at 585.57. Unfortunately, I have no idea where the top in AAPL will be, although many Wall Street analysts foolishly attempt to predict it. However, I can warn investors about one level to be cognizant of on the downside. 578.00, Friday’s low, which was just under Thursday’s low (578.55) is a place to exit if you cannot stomach a move back down to 550.00.

Now that International Business Machines (NYSE:IBM) has left 200.00 in its tracks, when will it reach 300.00? Well it is no AAPL so that may take awhile. Interestingly, some traders or funds placed a large wager on Friday in this issue. After spiking nearly a point and a half (207.52) over the previous all time high (206.18) during the session, IBM closed .01 off the low of the day at 206.01 on monster volume. Whenever a stock or commodity closes near the high or low of the day, it provides a good trading set-up for a continuation of the existing move or a reversal the following session. Furthermore, IBM’s volume, double the three month average daily volume (4.6 million shares), at 9.6 million shares adds further importance of this level. Of course some of the volume may be attributable to options expiration. I encourage owners of IBM to focus on 206.00 if they are tempted to lock in some profits during next week’s trading.

Chevron Corporation (NYSE:CVX) was finally able to make a new 52 week high (112.38), but was unable to close above the long standing 52 week high of 110.99. The reason for this being, is that once the HFT’s take out a major level, there is never enough volume in this decimal laden world for them to exit their longs at a profit. Thus, they all end up puking out their longs at the same time and CVX spikes down and then floats back up. Looking at the charts since last April every time CVX has made a new 52 week high it has violently sold off. Of course, during those time periods there was an overall heightened volatility in the market. Nevertheless, two fundamental factors seem to be affecting the price of crude oil which has an influence on the price of oil stocks. The first one being, will Israel attempt to take out Iran’s nuclear facilities. Secondly, if and when is Obama going to release any of the United States strategic oil reserves. Since I do not have an answer to either of those questions, long term investors should place their sell stops at 108.00 and let the market take you out of your position.

Microsoft (NASDAQ:MSFT) is doing what it always does. Double or triple top or bottom, slight retreat from it, then consolidation and an upside breakout or breakdown. However, this week MSFT has indicated that the next move may be south. After making a triple top (32.88, 32.94 and 32.95), it has made a triple bottom (32.49, 32.58 and 32.50) during the last three trading sessions as well. More importantly, MSFT settled on Friday (32.60) near the lower end of this range. Therefore, a lower open on Monday could signal an end to MSFT’s current run from just under 25.00.

General Electric (NYSE:GE) made an impressive move last week. Following through on the company's confirmation of earnings projections last week with a vengeance. After trading between 18.50-19.50 for the majority of 2012, GE was able to close above 20.00 for the first time since last April. If this momentum can continue in GE, look for a test of the 52 week high at 20.85 and the February 2011 high of 21.65. Only word of caution for this issue is that the current run of eight consecutive higher highs and higher lows is unsustainable. Perhaps a pullback and consolidation around 20.00 will occur this week. A string of closes under 20.00 may indicate a bigger pullback will be forthcoming.

Quiet week for Procter and Gamble (NYSE:PG). After Monday’s .78 gain, PG has run into some major institutional size at 68.00. And the HFT’s guys are loving it. Stepping out and shorting PG in the high 67’s was a consistent money maker for the remainder of the week. With PG succumbing to the selling pressure on Friday and testing the quadruple top area that it broke out from on Monday, expect a 67.00-68.00trading range until the size at 68.00 is satisfied or the buyers at 67.00 disappear.

Johnson&Johnson (NYSE:JNJ) has offered up a similar scenario to PG. Institutional size at 65.50 has capped every attempted rally in JNJ for the entire month. There is simply no driver for this issue until the next earnings announcement on April 12th. Since going ex-dividend last month JNJ has been able to recoup that dividend ground, but that is it. Also, this issue has been ignored by Wall Street analysts for some time. With the only significant news being the announcement of a new CEO and Warren Buffet’s exit from this issue, expect more of the same this week, with 65.50 acting as major resistance and 64.80 as major support.

AT&T (NYSE:T) is looking toppy. Three consecutive highs between 31.65-31.80 have kept a lid on the rally from 30.00. Of course, the 52 week high of 31.94 and the institutional size at 32.00 has provided the HFT traders with another issue to feast on. Therefore, the tug of war will continue until the size at 32.00 is taken out, or the major support at 31.35 is breached. Perhaps the announcement of the I-Phone 5deployment will be enough to keep the positive momentum going.

Once again, Pfizer (NYSE:PFE) is flirting with 22.00. After closing at 22.01 on Tuesday, PFE was not able to post another close above 22.00 for the rest of the week. With 22.10 acting as a double top and 22.17 being a four year high, this area is going to be difficult to penetrate. Without the positive announcement of a new drug trial or a hike in the dividend, there is no driver for this issue. Nevertheless, a string of closes above 22.00 may be enough pressure to induce a rally in this heavily shorted issue. The longer the consolidation at 22.00 persists with no break-out to the upside, the more likely PFE with drift down to the major support at 21.00.

In closing, there appears to be no end to this bull market. With positive news on the financials, there is an entire new sector for traders and fund managers to focus on. Keep in mind, many of these issues (GS, MS, JPM, BAC, and WFC) have a ways to go, in order to reach their 2008 levels. Unless an I-Pad blows up in someone’s face and kills them, there is no reason to be short this market. But just to be on the safe side, focus on a close below 1384.00 (June futures) to indicate a change in this rosy scenario.

Disclaimer:
All of the information, material, and/or content contained in this analysis including any numbers provided in this analysis are for informational purposes only. Premarketinfo.com and it's owners are NOT registered investment advisors, and cannot make buy or sell recommendations. Please consult your own independent financial advisor before making any investment decisions. We will not be held liable for any direct, indirect, or consequential damages arising out of the use of any information provided in our security analysis.

17,000 SHARE TRADE ROCKS AAPL-ARE YOU KIDDING ME?

CNBC has reported a 17,000 share block trade sent AAPL tumbling over 10 points this morning. First of all, good thing it was not 34,000 or 51,000 shares or AAPL would be under 500. Secondly, who in their right mind would actually show an order of that size to the street? The dark pool and HFT traders must have thought they died and went to heaven. In other words, that trader would have been so much better off placing 17 x 1000 share orders to get off his or her execution. If he or she would have enetered the order in that fashion, most likely they would been filled within a few points. At what price do you think a majority of that order was executed at, you guessed it, 526.00. What is the moral of this story? If you as a fund or an individual have a sizeable AAPL position, you better have an good exit plan. More importantly, use today's price activity as an example of what NOT to do.

BREAK OUT OR FAKE OUT IN GOLDMAN SACHS?

A six point up move in GS (Goldman Sachs) yesterday, found very little media coverage. However, this quiet rally in GS was very significant from a technical perspective. This issue, finally cleared the major resistance at 118.66 with a vengeance, and traded as high as 121.24 before settling at 121.13. What is next for this highly volatile stock?

First of all, this move occurred after earlier in the week GS reported in a regulatory filing that they may be charged with civil violations, for disclosure issues in the mortgage backed securities markets. From my experience, when a stock fails to break down after negative news hits the tape, it means it is going up. Most likely, whatever fines they may receive will be a drop in the bucket compared to their overall revenue.

Secondly, GS had a quiet February of consolidation (trading the entire month in a 7 point range) after it's strong January rally from the 90 dollar area. Perhaps now that it has cleared 118.66, the stage is set for a test of the July high of 139.25. A string of closes above 118.66 would bolster the chances of this scenario coming to fruition.

Also, the positive earnings report from last quarter and upward guidance are hard to ignore. The tenor of their conference call was that the company had navigated through a volatile 2011 and has positioned themselves well for 2012. As always, one positive earnings report does not make a trend, but I am sure the company is capitalizing on the last leg up in the markets.

So how do you try and capitalize on the next move in GS? You could buy the 140 calls or any other out of the money options, but you may watch your premium erode as the stock zig-zags it's way up to your strike price the day after the options expire. You could place a bid at the level it broke out from, 118.66 and pray for a pullback with a stop at 108.66, to employ a 2 to 1 risk-reward (138.66 target). Or you could simply buy the issue now (120.50) with a stop at 118.00. That way, if the break out becomes a fake out a least your losses will be limited.

In closing, GS has paid back Warren Buffet, steered its way through a treacherous 2011 and is well positioned to participate in the Facebook IPO (which I think is going to be a gangbuster). So until the tape tells a different story, figure out a way to participate in the potential rally in Goldman Sachs.

Disclaimer:
All of the information, material, and/or content contained in this analysis including any numbers provided in this analysis are for informational purposes only. Premarketinfo.com and it's owners are NOT registered investment advisors, and cannot make buy or sell recommendations. Please consult your own independent financial advisor before making any investment decisions. We will not be held liable for any direct, indirect, or consequential damages arising out of the use of any information provided in our security analysis.

Dark Secrets: Where Does Your Retail Order Go?

Back when I started trading in 1999, the majority of trades took place on the exchanges themselves.  But now, believe it or not, many retail orders never see the public exchanges.  If these orders aren't sent to the public exchanges, where do they go?

Many of these retail orders are internalized.  In simple terms, that means the opposite party to your executed order was your broker/dealer themselves.  These retail orders never leave the brokerage house.  Other times your broker will ship your order to an over-the-counter (OTC) market-maker.  The OTC market maker will pay your broker a fee, for the privilege of trading against your order.  This is known in the industry as "payment for order flow".

Why is there so much interest in trading against retail orders?  Because many retail orders are "uninformed", meaning they don't have much knowledge of where the stock is going in the short-term.  The most uninformed order is the "market" order, which is willing to pay any price to buy or sell the stock. 

Market orders are very attractive to trade against because it allows the broker/dealer, or OTC market maker the best chance of capturing the spread.
 

Consider a stock like Bank of America (BAC) that can trade in a 1 cent spread for hours on end.  Assume the NBBO (National Best Bid and Offer - the public quote) for BAC is $5.25 bid for 100,000 shares and $5.26 ask for 100,000 shares.  A trader placing an order to buy this stock at $5.25, would have to stand in line behind the 100,000 shares that were bid before them.  Similarly, a trader placing an order to sell the stock at $5.26 would have to stand in line behind the 100,000 shares that were offered ahead of them. Now assume, a retail trader sends a market order to sell BAC.  In the old days, the market order would typically be executed against the participant bidding $5.25 on a first-come, first-served basis.  But now the mechanics can be quite different.

The OTC market maker (paying for the retail order flow) intercepts the retail market order, and buys the stock for their own account at $5.25, leaving the participant bidding the stock on the public exchange at $5.25 unfilled. 

Now assume a retail trader sends a market order to buy BAC.  This order should be executed against the participant offering the stock on the exchange at $5.26 on a first-come, first-served basis. 

But again, the OTC market maker intercepts the retail market order, and sells the stock for their own account at $5.26, leaving the participant offering the stock on the public exchange at $5.26 unfilled.  The OTC market maker pockets the one cent spread.

The OTC market maker is in essence, jumping the order queue, allowing them to transact again and again at the front of the line, as retail market orders are sent from various retail brokerages.  Do this thousands of times per day and the profit from capturing that one cent spread can add up to a substantial sum.  If you like math, here is the calculated estimates:

Considering the average daily volume over the past three months on BAC is 264 million shares per day.  The SEC estimated in 2010 that 17.5% of trades are internalized, meaning 264 million shares x 0.175 = 46.2 million shares internalized.  Considering the average spread in BAC is 1 cent, then OTC market makers have the potential to make:

46.2 M / 2 x $0.01 = $231,000 per day (note you divide by 2, because it takes 2 transactions to capture the spread; the buy, and the sell).

$231,000/day x 250 trading days per year = $57.8 million per year just in BAC.

As you can see, this queue jumping can add up to serious money over time.

Where does that money come from?  It comes from the participant who was left unfilled on the public exchange.  Because if the participant was left unfilled, they would have to do one of two things: 1) pay the spread - which in the case of BAC is 1 cent or 2) remain unfilled - in which case the loss is unquantifiable as the participant may never be filled.

Why is this allowed?  To justify the practice, OTC market makers will often offer price improvement to the retail market orders.  Usually this is a few sub-pennies better than the NBBO.  Instead of printing the market sell order at $5.25, they print the order at $5.2501.  This saves the retail trader a whopping 1 cent on their $525 order. 

But let's give the benefit of the doubt here, and say that the OTC market maker offers $.001 price improvement per order, instead of $.0001 per order.

46.2M x $.001 = $46,200 per day or $11.6 million per year in price improvement in BAC.

So the public is still out $46.2 million ($57.8M - $11.6M) in BAC.  And that's assuming that the participant paid the spread.  If they refused to pay the spread, the losses are unquantifiable, as the participant may never be filled.

The bigger problem is the role these internalization practices play on displayed liquidity.  What point is there to bidding a stock if some privileged participant is able to step in front of your bid at the moment the stock is about to be sold to you?

This practice discourages participants from placing passive limit orders, and hence, the market is left with less liquidity.  With less liquidity we become prone to future flash crashes (yes, remember that ugly day back on May 6th, 2010 when the market fell 6% in five minutes only to rally it all back).  And we keep wondering, what caused that flash crash.  Maybe we should take a deeper look into broker-dealer internalization as a possible cause.

So next time your broker tells you that you received price improvement on your order, let them know that you'd rather they keep the sub-pennies, and execute your order against the quote on the public exchange.  You'd be much better off in the long-run.

Sector Rotation

Dennis Dick from Premarketinfo.com explains "sector rotation".  Money has recently been moving out of defensive names, and into financials.

TIME TO GET BULLISH-OMG

So the Santa Claus rally has the market flirting with the October highs and
everyone is anxiously awaiting the January effect. Will the market bust
through major resistance and test the mid year highs, or retreat into the
much publicized trading range that has held since August? Perhaps making
this area 1250 (March futures) as support in an expanded trading range
up to the 1350 level.

The bulls will tell you that the European situation is all but solved. And
even if it is not, where is a better place to have your money than in the US
during an election year. Like there is going to be a huge spike in interest
rates now or ever? Not to mention earnings that are going to blow away
revised downward estimates. Finally, all the cash on the sidelines, that
has been getting whipped like a red-headed stepchild since 2000, has
to go somewhere. In fact, several of the major components of the Standard
and Poor’s 500 Index are already trading at or above their October highs
(XOM, IBM, MSFT, CVX, JNJ, PG, T, GE and KO). Not to mention CVX
and IBM hitting recent all times highs in the past few weeks.

The bears will note that the European situation is not resolved nor will it
ever be. There simply has not been enough focus on how far we are from
a resolution. In other words, the negative reaction in the futures markets
overnight has been muted. Also, how much higher can the market go
without some boost from the financials, as many are trading dangerously
close to their 2009 lows. Also, how much upside is there still to be had in
Big Mac’s and Ipads?

With earnings season on the horizon, is the market destined to breakout
of the 1243-1280 range that has held since December 28? At this time, it
sure seems to be leaning toward the upside breakout as opposed to the
downside. Nevertheless, let’s not guess and let the numbers tell us. My
numbers are telling me three closes below 1250 (March futures) we
are going south, three close above 1280.00 (March futures) and we are
heading north.