Exone Company (XONE) lowered guidance after the bell tonight. 3D Systems (DDD) immediately started getting whacked on the news in sympathy, but Stratasys (SSYS), another sympathy play, was slow to respond.
Some might argue that SSYS lowered guidance earlier this morning and their down move was already priced in, but this was not the case. In fact, the stock could not immediately trade lower on the XONE lowered guidance due to the uptick rule.
Yes, the uptick rule still exists, but it only applies in certain situations. The uptick rule still applies if a security drops by more than 10% (which SSYS did today). So nobody can short the stock without an uptick for the remainder of the day (and the following day).
But this rule actually interferes with the natural price discovery process, and uninformed investors can be punished as a result.
Let’s dive into the details of the SSYS trading action after the bell:
The XONE news breaks shortly after 16:05, and everyone gangs up on the offer at $119.06 to try to short SSYS (myself included). You can see how the offer builds in this image:
Then some unfortunate traders decide to place buy orders for the stock and are executed against the $119.06 offer (My offer was not one that was executed).
These traders are completely uninformed because the SSYS price has not fully adjusted for the news, and cannot adjust until a natural seller sells the stock which happens here:
The price drops to $119, and informed traders gang up on the offer again at $119.01 trying to get short:
Eventually another natural seller comes in and the stock falls down to a price of $116 a few minutes later.
My issue here is with the unfortunate buyer of the stock at $119.06. Had the uptick rule not been in place, the SSYS price would have been able to adjust much more quickly, and the unfortunate traders that bought the stock at $119.06 would have likely gotten a much better price.
This is a good example of why we should not reinstate the uptick rule, and in my opinion the rule shouldn’t exist at all as it slows down the price discovery process.
With the broad market making new all time highs, almost on a daily basis, one issue far from its all time high is Icahn Enterprises LP (NASDAQ: IEP). Since catapulting to 149.77 on December 9th, the issue has declined to 113 and shows no sign of reversing course.
All of this taking place with many of Uncle Carl’s top holdings trading at 52 week, multi-year, or all time highs. For example, his well publicized purchases of Apple (NASDAQ: AAPL), Herbalife (NYSE: HLF) and Netflix (NASDAQ: NFLX) have made incredible moves, aided by Tweets revealing his investments in these issues.
Since the IEP share price is not following his stable of investments, there must be another reason for the precipitous decline in its price over the last 13 trading sessions. That reason – the “Icahn herd” is getting taken to the cleaners. Investors looking to emulate his performance simply piled into the issue with reckless abandon.
Obviously, these uninformed investors paid little or no attention to IEP’s Net Asset Value (NAV) which was approximately $75 as of November 30th. Simply stated, the “herd” was paying up to double the NAV to “rub elbows” with the biggest star on Wall Street.
Of course, IEP should be afforded some sort of premium because of Icahn’s stellar performance, but paying double the NAV for any issue seems a bit ridiculous.
Keep in mind, IEP is still up 250% for the year, far outdistancing the broad market, so any further pullbacks for the issue can be construed as healthy. However, the herd that joined the party a little bit too late is significantly under water here.
Perhaps once the weak hands are finally forced out, which may be near the major support level of 110, IEP may resume its rally. However, this journey north, if it indeed does take place, may be greeted with many more sellers than on its first occasion. The reason for this being that buyers that got burned the first time, will be utilizing any rallies to exit the issue.
It is a dangerous game chasing stocks because when the momentum swings the other direction it can get ugly in a hurry. With the 7% pullback in Twitter (NYSE:TWTR) today, you wonder if the trading herd is caught again?
On many occasions, significant moves in the market occur after a period of consolidation. Consider the recent trading action in the S&P 500 Futures. The index had a significant period of consolidation back in mid-November when the contract posted four of five closes between 1765 and 1767.50. Once that area was cleared on November 13th (1778.75), the index reached 1800 only four trading sessions later.
At this time, the index has posted five consecutive closes within a three point range from 1801.25-1804.25, which is rare in this volatile trading vehicle. This area should act as major support early in this week’s trading, and could be the base to catapult the market higher (since it is hard to argue the trend is anything but up). However, if this 1800 level is breached, a much overdue significant correction could take place, taking the contract down to the 1775 level and perhaps even as low as 1735. It is critical that this market hold the psychological 1800 level this week.
Every so often, a stock can get stuck at a key technical level as the bulls and bears jockey for position. I call these key levels “magnets”. Apple appears to be caught in the $500 magnet.
Take a look at the trading action in AAPL over the past 10 days:
Every time the stock rallies, the rally fails and the stock pulls back to test the 500 support. The opposite has held true as well. Every time the stock has fallen under 500, it turns around and rallies right back over it.
Technically, the magnet continues to hold for a number of possible reasons:
1) Traders have identified this area as support and continue to buy the stock at the 500 level. As the stock rallies, those same short-term traders scalp out of their longs which doesn’t allow the stock to gain any significant upside momentum. Eventually the stock just collapses back.
2) Short-term traders have identified the relevance of the 500 level and continue to short the stock when it pops. Again the stock cannot gather any upside momentum to break the force of the magnet.
3) The whipsaw effect. Traders continue to be whipsawed as they try to play the breakdowns through the 500 level. As the stock falls through the 500 level, longs leaning on that level bail, and shorts jump in playing the potential breakdown. The short-term trading herd moves from being long to being short, and the trade becomes crowded on the short side. The path of least resistance is then higher towards the 500 level, pulling the stock back up.
Regardless of the cause, if a trader can identify these magnet levels early on, there can be some significant opportunity to profit from these “Magnet Trades”, by simply fading the moves away from the level of significance.
In 2008, aluminum prices ran up to $1.40/lb. Alcoa (NYSE:AA), the largest aluminum producer had a nice run up as well, trading at $44.77 in May of 2008. Then the aluminum market turned south and over the course of the next nine months, the price of aluminum cascaded down, bottoming at $0.60/lb in February of 2009.
During this period of decline, Alcoa appeared to be cheap all the way down. It looked cheap when it traded at $30 in August. It looked even cheaper when it traded down to $20.93 in September. The value investors were swarming when it traded down to $9 in October. But the price just kept falling, and Alcoa finally bottomed out at $4.97 in February of 2009. A nearly 90% decline in just 9 months.
This pricing action looks eerily similar to what is happening in the mining stocks.
Gold was trading north of $1700/oz in November of 2012. But the gold market has got ugly, punishing every investor that was looking to gold for defense, and punishing the miners even more.
Take Barrick Gold (NYSE:ABX) for example. The stock was trading at $43.19 in September of 2012, but since then the falling price of gold has taken its toll on the miner. The stock price appeared cheap at $30.00 in March. It looked like a steal at $20 in April, but broke through $15 today.
Where is the bottom?
Judging from the price of gold, the bottom could still be much lower. As of today, gold has now traded down to $1200/oz. This is a serious issue for the mining stocks because the all-in cost of production of gold has been steadily rising. For many of the miners, this cost of production is now upwards of $1100-1200/oz. This means that if the price of gold stays at current levels, many mining companies will struggle to make money.
Barrick Gold is in a little better shape as they estimate that their 2013 cost of production will be around $950-1,050/oz. So it can still be profitable with the gold price at current levels. But needless to say, their margins are getting squeezed.
No one knows where the bottom for the miners will be, but Alcoa lost 90% of its value in that 9 month period as the price of the underlying metal declined. If the miners have a similar move, and if they struggle to remain profitable as the price of gold declines, it is not unreasonable to think that the fair value of these miners might be lower yet.