By Jeffrey Saut, Chief Investment Strategist RJF, Monday 27th March 2017
“Pull” is a term used in shooting sporting clays, which are supposed to represent real birds and sharpen the shooter’s ability to actually hunt live birds. The term is yelled by the shooter to tell the person operating the trap to launch a sporting clay. “Pull” comes from an era long gone by when they actually had real birds in cages and the shooter would say “pull” to have the cage cord pulled and release the bird. The term “pull,” however, took on a whole new meaning last Friday when Speaker Ryan “pulled” the Republican healthcare bill (H.R. 1628) from consideration. I had literally said on CNBC earlier that day (as paraphrased): I lived in Washington D.C., and still have a pretty good network on Capitol Hill and typically what happens, if they don’t think a bill will pass, they pull it (read: withdraw it). But, there is NOTHING typical going on in D.C. these days! I also opined on the same show that – I was hearing that H.R.1628 was a few votes short of the ability to pass. Even if it had passed there would have been major revisions to it in the Senate. I guess it was once again the Russians that influenced the death of H.R. 1628, since they are being blamed for just about everything else. The question now becomes, “How will the various markets view Friday’s Foil?”
Speaking to many media types late Friday afternoon I suggested that a lot of technical damage has been done to the charts during the week. The S&P 500 (SPX/2343.98) broke down from its trading range of 2350 – 2400 that has existed since mid-February. The SPX has also closed decisively below its 20-day moving average (DMA) that has served as a support level since last December (Chart 1). Clearly, the gap in the price chart created by the Fed Fling (March 15, 2017) on the rate ratchet has now been filled raising the question, “Will the upside gap that occurred on February 10, 2017 to February 13. 2017 between 2311.08 and 2311.10 be filled?” Moreover, will the Trump agenda disappointments lead to a 0.328 Fibonacci retracement of the recent rally toward a downside target price of 2278? To be sure, smart money is “betting” that way given the divergence between the CBOE SKEW Index and the Volatility Index’s (VIX) SKEW (Chart 2). As defined by the CBOE:
The CBOE SKEW Index (“SKEW”) is an index derived from the price of S&P 500 tail risk. Similar to VIX®, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant. One can estimate these probabilities from the value of SKEW. Since an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities, familiar to option traders as the “SKEW”.
Ladies and gentlemen, the current CBOE SKEW is around 145, and well above what the CBOE website describes as, “As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant.” Further, the VIX SKEW has diverged with the CBOE SKEW suggesting something BIG is getting ready to happen in the equity markets. Additionally, there is still plenty of “internal energy” to foster such a move, but unfortunately our internal energy indicator does not tell us if that energy is going to be released on the upside or the downside. Our hunch remains that it will be released on the downside for the aforementioned reasons.
Accordingly, we have assembled a potential “buy list” since we think any decline will be contained. Names for your consideration that screen positively on our models, play to some of our themes, and are favorably rated by our fundamental analysts, include:
Applied Optoelectronics (AAOI/$55.02/Strong Buy) develops and manufactures optical devices, including laser diodes, photodiodes, related modules and circuitry, and equipment for applications in Fiber-to-the-Home, cable television, point to point communications, and wireless.
Athenahealth (ATHN/$108.60/Outperform) works to achieve faster reimbursement from payers, reduce error rates, increase collections, lower operating costs, improve operational workflow controls, and more efficiently manage clinical and billing information for its ambulatory clients.
DexCom (DXCM/$82.62/Outperform) is a leading provider of continuous glucose monitoring (CGM) systems that enable people with diabetes to more frequently and conveniently manage their blood glucose levels.
ICU Medical (ICUI/$155.65/Strong Buy) is a provider of disposable medical connection systems, custom IV sets, and accessory devices used in vascular procedures and critical care settings. Its devices prevent catheter-related bloodstream infections and protect healthcare providers from accidental needle sticks.
Flexion Therapeutics (FLXN/$27.27/Strong Buy) is a specialty pharmaceutical company focused on the development and commercialization of novel sustained injectable pain therapies. The company’s primary focus is osteoarthritis (OA),
Mylan (MYL/$40.96/Strong Buy) is a leading global pharmaceutical company engaged in the development, manufacture, and marketing of prescription generic, branded generic, and specialty pharmaceuticals offering one of the broadest product portfolios in the pharmaceutical industry.
Premier, Inc. (PINC/$30.10/Outperform) is a collaborative healthcare alliance of 3,750 U.S. hospitals, 130,000 alternate sites, and 400,000 physicians. The company operates through two segments: 1) supply chain services, including a group purchasing organization (GPO), direct sourcing, and specialty pharmacy; and 2) professional services: informatics and advisory services.
Texas Capital Bancshares (TCBI/$80.25/Outperform) is an $18.9 billion asset bank holding company with 13 full-service branches in the business centers of Austin, Dallas, Fort Worth, Houston, Plano, and San Antonio.
Trimble Navigation (TRMB/$31.32/Outperform) applies technology to make field and mobile workers in business and government more productive. Its solutions are focused on location/position based applications for use in agriculture, construction, fleet management, and more.
The call for this week: It is interesting that the Advance/Decline Line peaked coincident with the S&P 500 (SPX) on March 1, 2017 (Chart 3). Also of interest is that the SPX has bounced off of roughly the 2340 level for three consecutive sessions and has had a cluster close around the 2345 for those same three sessions. In the process the daily candlestick chart has been a “doji” pattern in each of those sessions (Chart 4). According to Investopedia, “A doji is created when the open and close for a stock are virtually the same. Doji tends to look like a cross or plus sign and have small or nonexistent bodies. From auction theory perspective a doji represents indecision on the side of both buyers and sellers. Everyone is equally matched, so the price goes nowhere; buyers and sellers are in a standoff. Some analysts interpret this as a sign of reversal.” And don’t look now, but the average Russell 3000 stock was down almost 18% from its 52-week high and 30% are down more than 20%. This morning, it’s bombs away with the Spoos off 20 points . . .
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Black MondayOn 19 October 1987, the stock markets experienced a dramatic plunge that prompted many firms to shut down their trading desks and turn off their phones to minimize internal losses. Raymond James refused to do the same. Our desks stayed open to help meet clients’ needs, resulting in our first and only unprofitable quarter since the firm went public in 1983. |
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Who was Raymond James?The Raymond in our name is actually from Edward Raymond, owner of a 15-employee mutual fund sales group, Raymond and Associates, along Florida’s west coast. He sold his company to Bob James on 15 July 1964, on condition that the surviving firm be called Raymond, James & Associates. Three days after the sale, Ed Raymond was involved in a near-fatal automobile accident and never joined the firm. Nonetheless, even after Raymond had passed away, Bob James insisted that his name remain on the door – ahead of James’ own. That was a promise he made to Ed Raymond three days before the accident, and Bob James was a man who kept his promises. |
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Bear Market of 1974The severe bear market of 1974 threatened the existence of Raymond James, which was bleeding capital by the day. Tom James, his father and other leaders took extreme measures to keep the firm afloat, slashing costs, foregoing paychecks and even attempting to sell the firm for just enough capital to protect client assets and retain as many associates as possible. The story could have ended very differently if not for a sharp upturn and continued rebound in the stock markets late in the year. |
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Taking Raymond James PublicWhen consideration was being given to taking Raymond James public, Tom James penned a letter to shareholders (largely employees at the time). ” … the public offering should be considered as a statement of our independence. While this is a psychological rather than an economic rationale, it is nonetheless very important. We have asserted for some time that we are not interested in becoming a small part of a very large corporation. That assertion results mainly from the inclinations of management rather than the economic benefits associated with either alternative. The public stock offering affords us the opportunity to enjoy a little bit of the best of both worlds. While shareholders will be given liquidity at fair market value, we will still have the ability to control our own destiny.” After 40+ years of Tom’s leadership, upon becoming CEO, Paul Reilly was often questioned about whether the company might ultimately surrender its cherished independence and be acquired by some larger entity. His response: “Not while I’m around.” It’s a theme that continues today. |
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