Should you hire an
investment advisor who utilizes mutual funds?
MARKET RAP
see Steven Benharris' Instablog on seekingalpha.com
"Never Fails" June 9, 2010
Nothing brings out the bears and shorts like a market
decline, and the sell off of the past six weeks has been no exception. While
sentient has not turned "I wanna kill myself" ugly, it is quite negative. I
will not bore you again with all the indicators I frequently point to, suffice
it say sentiment has turned very negative, put buying and shorting are up. The
sentiment indicators net out to the lowest levels since the market took off in
March of last year.
Just like market peaks coincide with rabidly bullish
sentiment, buying opportunities correlate with high levels of pessimism. On
April 14th, in "Can't Come Down", I attempted to warn of the fluffiness in the
market and high potential for a sell off. Expressing those sentiments to others
resulted to me being dissed, which I admit is one of my great sardonic pleasures
in life.
At this juncture, there are lots of calls for market declines
and experts advising you as to how only they can protect you in a bear market.
Furthermore, they refer to themselves as contrarians. The contrarian position
was to be bearish in April and bullish this week; which doesn't make it
necessarily right or wrong, but does make the present contrarian position
bullish. The opposite of being a contrarian is momentum investing. Momentum
investors believe in following a trend once t is firmly in place, then riding
it. What is odd is that momentum investors will often claim they are
contrarians, although the opposite is not true. Here's the best part: the same
advisor who urged you to buy in April and sell this week will claim in the
future that he said the opposite and called everything correctly to the day.
To go on the on the record, today, June 9, 2010, with the S&P
at 1055, I am short nothing and have started finding buying opportunities again.
I interpret the recent pullback as very healthy for the overall market. The
market had gotten frothy and investors had grown complacent, making the market
ripe for a correction. In addition to the many individual stocks I follow, I am
buying some ETFs, including the leveraged long instruments.
Of course, if I am wrong, I can just claim I said the
opposite. Call me a technician.
"Can't Come Down" April 14, 2010
The last time I looked and all the entities around me were
so high it was 1976. But I digress. Each pullback of a few percent in the past
year has been met with another round of dip buying. The S&P has rallied
almost 15% and the Russell 24% off
the dip earlier this year in just over two months. Once it becomes too easy to make money
in one direction, the game changes. But are we there yet?
A few weeks ago, I was invited to write an article for the
excellent investment website, seekingalpha.com, and did so. My task was to
select a stock to recommend, and I chose SBUX. I could have selected a short
position, but given the misperception sometimes held about me, that I am
perpetually short the market, I resisted the temptation to do so. The difficulty
was that in the aftermath of one of the sharpest year long market rallies in
history, the market in aggregate is certainly no longer cheap, so I made a
relative valuation judgment in highlighting Starbucks.
On February 28, 2009, about a week before the market
bottomed, I stated that "the markets are much closer to the bottom than the
top". I believe the opposite is true now. With a window of plus or minus two or
three years, the markets are much closer to their top levels than the bottoms of
March 2009. In that same post, I asked the question, "How low is low?" Now I
must ask the question, "How high is high?"
As Nixon would say, "Let me be perfectly clear." I am not
calling for a market crash or anything dramatic. McDonalds does change the sign
on how many billion they serve every day, and the market indices are not going
to go up another 60% in the next year. That would place the S&P around 2000 and
the Dow around 17K in the middle of next year. I am not sticking my neck out too
far out by assuring you that will not happen.
All the sentiment indicators I frequently point to, the
Investors Intelligence percent bullish, the percent bullish on the S&P, NASDAQ,
and Dow, the VIX and VXN, leveraged ETFs ratios, are all in overbought ranges.
It is the time to be prudent and set expectations rationally and reasonably.
Just like a very weak outlook was baked into equity prices a year or so ago, a
favorable outlook is already reflected in stock valuations today.
“Let the Wind Carry Me” b/w “I’m a Long Term Investor” October 19, 2009
In 1999, an “investor” told me about an Internet stock he had
just purchased. The share price was several hundred dollars a share, I can’t
recall the name of the company, it no longer exists, the stock went to zero.
When I tried to explain to the person how fundamentally unsound his investment
was, he eventually replied, “I’m a long term investor”.
The phrase “I’m a long term investor” is supposed to be
derisive to the other party in a conversation. It is often utilized after the
market has had a big run up by those jumping on a shorter term bandwagon in the
absence of fundamental reasoning, or as a rebuttal to a contrarian because he or
she resists running with the herd. If you are doing what is currently in vogue
with public sentiment, you denounce opposing viewpoints because after all, you
are a “long term investor”, you just bought a stock that has had a big run
because it went up yesterday.
Anyone who is reading this, first of all...You are not an
investor. There are almost no investors any longer, except maybe Warren Buffet
and a few others. If you were truly invested in an enterprise, you would not be
relinquishing your position with the click of button. There is nothing more
moral, intelligent, or sacrosanct about trading your stocks every 10 months
instead of every 10 weeks.
What is so great about the buy & hold strategy in this
millennium? Anyone who has been a buy & hold investor in the past decade has
done horribly, and would have been better off leaving their money in a money
market account. Berkshire Hathaway shares (Warren Buffet’s long term buy & hold
strategy) have also underperformed a money market in the past decade or so. In
the past year, the market has experienced the greatest decline and advance of
our lifetime, it made no sense to hold during the entire crash because you want
to chant some mantra about being a long term investor.
The market currently has a strong tailwind of psychology and
emotion at it’s back. “Let the wind carry me” Joni once sang, and it certainly
is carrying the market higher. Earnings schmearnings, fundamentals
schmundamentals. Could the psychology continue to carry the market higher? As
one small thinker once said, “You betcha”. I have come to the realization that
the best college major for an equities manager may be Psychology.
Watching the financial news reporting is like watching a
cheerleading contest. The announcers have hats that say “Dow 10,000”, there are
slogans like “Octobermania”, as if a wrestling match is being promoted. The
agenda is to persuade the public to buy into stocks at the highest prices in a
year. Earlier this week, an “expert” came on CNBC and stated that the Dow will
close above 11,000 THIS YEAR.....bite me. Another guestpert came on and gave
his projection for the S&P based on earnings of $70 next year. Business Week
projected $74.91 in earnings for the S&P 500 in CY2010. Where are these numbers
comings from? Since this is a clean website, I’ll just say they are being
plucked out of thin air, you can create your own expletive. It makes no more
sense to calculate the S&P based on of earnings of $75 over the next four
quarters or CY2010 than it does to use a $35 estimate. Actually, the $35
estimate makes more sense as it closer to where earnings are most likely to come
in. When hucksters and schuckters want to promote an issue (it is illegal for a
professional to use technical analysis or momentum, they are required by SEC
regulation to site fundamental justification), they just state “well based on a
multiple of XXX times earnings of <insert some unsupported rosy number>, we
project this index or stock will be at <insert some high level>.
At less than 22, the VXN is below where it was in August
2008, before the financial crisis hit, while the VIX is still about 7% higher
than it was then. Both are down more than 60% from their highs during the peak
of the crisis, and well below their moving averages, but still have a long way
to go to fall to the “what, me worry?” days of 2006 & 2007.
Gotta go. I’m a long term investor
“Reality is a fiction” October 11, 2009
In the past week, many investment media personalities have
expressed their bullishness for the market in front of the camera. Most read
from a similar script, because the environment is so dominated by bearish
sentiment, they are bullish due to their contrarian nature. However, sentiment
is not bearish, every sentiment indicator is either neutral or slightly
bullish. If sentiment were bearish, the parade on television would be of bears,
not bulls, like it was earlier this year. The time for a contrarian bullish call
was seven months ago, not 7 hours ago.
An occasional valuation statement was made, set’s let examine
the fundamentals. Earnings estimates for the S&P for next year are $41-$45,
which means that the S&P index is selling around 26 times 2010 projected
earnings. A median reading from the last century is in the upper teens. In the
past four quarters, the S&P earned an abysmal $7, putting the trailing p/e
around 140. Estimating future earnings is challenging, and very often not
accurate. Two years ago, the projection for the four quarters just ended was
about a dozen times higher than the actual, only an 1100% miss. What valid
valuation justification could one make for the bullish case? Suppose you
believe earnings estimates are low and the S&P will earn $60 or $70 next year.
In that event, you would have to defend anticipating almost 1000% annual profit
increase in the S&P in an environment with the highest unemployment in 70
years...better you than me. What if 2010 S&P earnings come in at $35? No matter
how you slice and spin it, the earnings estimates do not make stocks
compellingly cheap based on traditional valuation analysis.
Why do so many investment managers, who have experienced many
ups and downs and become familiar with market swings, often become so ebullient
when prices are high and negative when prices are low? Are they just wrong that
often? I don’t think so. By proclaiming one’s bullishness in the aftermath of a
market rally, or bearishness in the wake of sell off, it creates the illusion
that they called the market correctly, let’s call it the “I Told You So” effect.
My anecdotal experience in recent weeks raises some concern.
Expressing anything other than extreme bullishness makes one about as popular as
Obama bin Laden screaming “Death to America". In late February and early March,
when I expressed my thoughts that capitulation was approaching and I anticipated
the markets moving much higher, I was similarly derided.
Are there arguments that can be made for the bullishness? Yes,
most indubitably. Why is the market going up? It is going up because it is
going up, it is primarily psychologically driven at this point. If one is
bullish because they believe the psychology will remain strong, that the stupid
people haven’t people haven’t gotten in yet, that is a very valid argument. You
are bullish because you don’t believe in “fighting the tape” and follow the
momentum and believe there is a lot left to run.
There is also the interest rate and money on the sidelines
argument. With interest rates so low, there is a significant supply of
potential market fuel in low interest yielding reserves. A low interest rate
environment could translate into a justification for above average p/e ratios
for equities. Therefore, a p/e of 25 or 30 is justifiable.
Regardless of whether one is bearish or bullish, they should
at least know why they are one or the other. If one is currently bullish,
it is not due to being a contrarian or based on a valuation analysis. I am not
some Pollyanna calling for a catastrophe, I have not even labeled myself a bear
or stated that I am not bullish, just that the reasons they are claiming to be
bullish are not the ones that make them bullish. Think of how foolish it would
sound for someone to proclaim they are bearish now because interest rates are so
high. The market recovered about 2/3 of the damage from the seven month crash in
the following seven months, that is certainly an impressive performance. I am a
realist and include the possibility the last third may not happen is record breaking
time in setting expectations.
“Records are Made to be Broken” September 23, 2009
I write frequently about the levels of bullish sentiment
associated with the various indices. The level of bullish sentiment is
approaching record breaking territory. At 88.6%, the BPSPX (percent bullish on
the S&P) is only 1/5 of a percent shy of setting a new all-time record. The
BPSPX hit 88.8% on January 23, 2004, the highest level since the data began
being recorded in 1996.
The BPCOMPQ, which measures the percent bullishness
associated with the NASDAQ, hit 77.8% on January 26, 2004. Today it stands at
75.04%, so it would have to run for about 3% to set a new record.
The BPINDU, which measures the percent bullishness associated
with Dow Jones, hit a mind boggling high of 96.67% in May & June of 2007,
stayed at that level for several weeks, then revisited that same level when the Dow
broke above 14,000 in July. Today, the BPINDU sits at 93.33%.
Although the market is overbought, it is not as overextended
as it has been at other times in recent years. What would it take for the
bullish readings to smash old records? That’s easy, higher stock prices.
The VIX and VXN have come down from very high levels during
the crisis to more normal levels. Neither is at the low levels traditionally
associated with market highs, so there is still some room for the volatility
indices to fall before hitting the low levels traditionally associated with
market tops. The Fed announced today that they will continue to hold funds
rates at the lowest levels in history, adding more fuel to the market. However,
after a brief rally, a round of selling occurred, as some investors cashed in
some holdings after this magnificent run.
It’s Alright Ma, I’m Only Raising Targets September 19, 2009
While some look at the at the world, or in this discussion,
the stock market, through rose colored glasses, my bias has often been to look
through a less rosy set of glasses.
Oh well, as some warn victory, some downfall.
I tend to be more farsighted, seeing events that are further
out in the future. I railed against the brewing NASDAQ bubble of the late 90s
for a while before it burst. I thought the residential real estate market was
insane four or five years ago and due to collapse, but it ran for another year
or two before the inevitable happened. In that bubble, the market was held
artificially high and inflated due to a lot of shenanigans that we now all know
too well about.
We have been short term intermittently overbought for several
weeks now, but the buy-the-dip mentality has replaced the sell-the-rally
conscientiousness. People would rather be happy than pessimistic, which has the
potential the rally the market to levels ahead of underlying economic
conditions.
I called the market bottom in early March and predicted the
rally that has taken place. I expected the rally to take the market from S&P 670
to approximately S&P 1020, which I anticipated being a tough level to break
above. That level has been penetrated, and the level that technicians are now
sighting is S&P 1120, a 68% (Fibonacci) retracement of the market decline since
the last September’s collapse.
A few weeks ago, in “Downside”, I provided what I considered
to be the odds of various downside levels be reached or breached. Given the
strength in the market, I am tweaking the downside targets, seeing the
possibilities that various low levels may be less likely than I previously
anticipated.
I perceive only a 1 to 2% probability that the Dow drop will
below 8000 again within the next few years. The closing Dow low in July was
8164, which I see little chance of revisiting. When the Dow pulled back to 9300
two weeks ago, it was met with a wave of dip buying. Eventually, there will be
the little decline that will not be met with a enough dip buying to push the
market higher, and we will get a more significant pullback, but my net
projection is still bullish enough to see us in a cyclical bull market, just
tempered with a dose of reality, and a corrective bump or two along the way.
In the wake of this enormous rally, with the S&P percent
bullish at 88%, I am cautious for the reasons I’ve mentioned in recent
posts. The S&P 500 is more than 20% above it’s 200 day moving average. It’s
gotten easy, perhaps too easy, to make money in the market in recent months.
When the percent bullish last hit these levels in the first quarter of 2004, it
was only able to maintain the 86% level or higher for a few weeks, and spikes
above 88% only lasted a few days. During the Echo Bubble of 2003-2004, the
percent bullish on the S&P stayed above 70% for almost a year, as investor
confidence was restored in the wake of the market crash at the beginning of this
decade. If this era similar, spikes into the high 80s could be selling
opportunities, and buying opportunities could occur when the level is in the 70s
or lower, depending upon an investor’s aggressiveness for owning equities.
So while I consider the intermediate term possibility of a
nasty bear unlikely, I am cognizant of how overbought the market has become, and
a substantial part of me is on the sidelines waiting for a deeper pullback.
“Danger Will Robinson” August 30, 2009
The level of bullishness that has recently permeated the stock
market concerns me: A few facts:
The percent bullish on the S&P is 83.4%. That’s five buyers
for every seller. Here’s the chart:
http://stockcharts.com/h-sc/ui?s=$BPSPX
Investors Intelligence is 51.5% bulls & 19.8% bears. That a
B/B spread of 31.7 and a B/B ratio of 2.6. Here’s the chart and you can see how
infrequent that is.
http://www.market-harmonics.com/free-charts/sentiment/investors_intelligence.htm
I could go on posting charts. They are not as dramatic as the
two above, but they all point to an abundance of buyers of and a shortage of
sellers. Anecdotally, I had a couple of people tell me this weekend that they
were borrowing money, including taking out equity lines on their homes, to put
more money onto the market. While it is not 1999 style fervor, it is excess
bullishness.
Call me chicken or whatever you want. If this is a game of
chicken, I’m out. I have done a significant amount of selling in recent weeks,
built up cash, and hedged off a bit. I’m more interested in protecting profits
and assets than catching the last few percent of a bull run. It’s like buying
a house in 2005. Sure, it went up in value for a little while from an already
high level, but then....
Remember how it felt in March, when investors were saying
they would walk away from the market and never invest in equities again? That
is the best time to be a buyer. How does it feel now?
"Downside?" August 26, 2009
With the NASDAQ well above 2000, the S&P above 1000, and the
Dow approaching 9600, one thing that is rarely discussed today is potential
downside targets should the market correct. I expected, and projected, the bull
market that began in March. I also anticipated it running out of steam in the
past few weeks, it’s strength has surpassed my expectations. At this point it
is running primarily on momentum, I won’t belabor the point as I have written
about it previously. There is little expectation of a correction, or even much
risk perceived in being 100% long the market as August winds to a close. It is
not in spite of, but because the perception has turned so rosy that the
probability of a sell off increases going forward as the bullish sentiment
rises. I will outline what I consider the statistical likelihood of sell offs
ranging from 3% to 25% from current levels.
1. I am not a table pounding bear. I see the likelihood of a
25% decline, which would take the Dow below 7200, as a 1% probability. That
would drop the Dow below the level seen at the 2002 bottom, but above the March
2009 bottom.
2. I see the likelihood of 17% or 18% decline, nasty but not
quite an official bear, which would take the Dow below 7900, as a 4% or 5%
possibility, and would be 100% long the market if we dropped to those levels.
In that event, the market would still be above the bottoms of 2002 and 2009.
3. What about an official correction of more than 10%, but
not a resumption of the bear, something that would see the Dow drop back around
to 8200, Although this would require a 14% correction, it only would retrace
the last six weeks of this bull market, bringing the market back to where it was
the second week in July. I find even that unlikely, somewhere in the 10% or 12%
probability range.
4. Perhaps there will be a little scare, an 8 or 9% drop, a
little less than an official correction, dropping the Dow to around 8800? This
is certainly more likely, at least a 45% probability, with an opportunity to
realign portfolios accordingly.
5. Even those who are bullish acknowledge there is room for
pullbacks of 3 or 4%. The Dow was below 9200 just a week ago, which I believe
there is a 90% chance we will revisit.
My overall perception remains that we entered a cyclical bull
market in March, and with all the indices up in the vicinity of 50% in less than
six months, it would be healthy for the market to pause, pull back a little, and
digest the recent gains. Another observation is that the market of recent days
has been driven by big advances in the opening hour which are either not
sustained or followed by sell offs in the latter part of the day, a potential
sign of some buyer exhaustion setting in. The percent bullish on the S&P ticked
up even higher today, closing today at 83%. I researched back to 1996, where
the data begins, and the first quarter of 2004 was the only time the S&P percent
bullish exceeded current levels. During that time, the percent bullish stayed
above 80% for more than a quarter, with nearly two months of the period above
the 83% level, astounding indeed, considerably higher than the NASDAQ peaks of
1999 and 2000. I pour over sentiment readings and charts every day, there is
not one that reflects any current significant level of bearishness.
Perhaps it is in my nature to be concerned when the market
gallops like it has in recent weeks, I have never been particularly trusting of
parabolic moves in the market. I have more faith in a gradually sustained
market advance than a panicky “gotta-get-in-now” spike in the aftermath of a big
market run. Besides, since everyone is giving upside targets, I thought I would
provide some downside scenarios.
The market often does things to an extreme. We
certainly over corrected to the downside in the early part of this year, now
there is a little overshoot to the upside. If we overshoot back to the downside,
the lower probability events I discussed would occur. If there is simply
reversion to the mean, with the market trading in a narrower range, the higher
likelihood events will provide good trading opportunities for the nimble
investor. Having just experienced one of those rallies that only occur a few
times in a decade, I believe it is time to exercise some prudence. Scenarios 2
through 5 would still continue the bull market, and even scenario 1 does not
erase the market advance since March.
“Welcome to the Consolidation” August 21, 2009
For the past month, I have been writing about the enormous
move in the market, and that I anticipated a period of consolidation. I believe
that transition has started taking place in these past few weeks as I was
writing about it’s approach. In the past 20 trading sessions, the NASDAQ has
gone up on 11 days and down on 9 days. Welcome to the consolidation period.
After a year of high volatility and record setting market
swings, investors and traders nerves have been rubbed raw. The VIX and VXN
volatility indices, which shot to levels only seen a few times in a decade in
the last quarter of 2008, have fallen into more normal zones. I perceive, and
the volatility indices project, that we have entered a period of lower
volatility, although that is not saying much given the swings of the past year.
This is a boring prediction, it’s not going to sell any books, but that is not
my agenda.
For an active asset manager, this can be a favorable trading
environment. Prices are more reflective of underlying fundamental value, and
irrational moves less frequent. It is more about traversing hills and valleys
than mountains and cliffs. Semiconductors, oil services, and metals have been
the sectors I have most actively traded in the past month, although that is
subject to change as conditions evolve.
I also note that we are entering a time of the year that has
traditionally been challenging for the market, so a blip to the downside would
not be surprising, particularly in the aftermath of such a large sized gain,
with sentiment quite bullish. Another concern is that the more speculative,
lesser quality issues are the ones that are having the biggest percent gains
now, especially in the financial sector. The last holdout of the sentiment
readings, the put/call ratios, have also turned bearish. The index p/c close
today at 0.99 and the equity p/c closed at 0.39, for a total p/c ratio of 0.59.
These are low readings, reflective of too much bullish sentiment, as it has
gotten easy, perhaps too easy, to make money in this market. Investors
Intelligence percent bullish is 48.3%, more than twice as many bulls as bears.
These are the most bullish II readings since early 2008, before the market broke
down. The percent bullish on the S&P closed today at 81.2%, the highest level in
5½ years. For comparison, the percent bullish on the S&P dropped below 2% in
October 2008, when it seemed like the financial system was unraveling, and was a
paltry 13% when the market took off on March 9th. These are reasons
to exercise caution and set expectations appropriately.
There is quite an emotional struggle occurring amongst
investors presently, especially if they were on the sidelines (in cash
equivalents) during this rally. A lot of money has been made in the rally by
those who got in during the early stages, but what if there is another big
decline? Don’t miss out on one of the greatest market rallies of a generation,
but don’t be the bag holder who gets in near the top. Logical advice gets your
in a whirl.
August 12, 2009
Many, but not all, current sentiment indicators are flashing
overbought. Some sentiment indicators are in a neutral zone (there is still a
high level of put buying), but none are showing an oversold or net bearish
reading. The rally of the past few weeks has been primarily driven by momentum,
short covering, and performance chasing. The percent bullish on the S&P is
80.8%, which is the highest reading since January 2004, when the percent bullish
on the S&P peaked at 89%.
What is significant about January 2004? It was peak of the
Echo Bubble. The Echo Bubble began almost six years to the date before the 2009
rally, on March 11, 2003 in the week leading up to the U.S. invasion of Iraq.
The market, lead by the NASDAQ, rallied for 10 ½ months without taking any
significant breathers along the way. During the Echo Bubble, like a drug addict
falling into relapse, the public became enamored again with technology stocks,
especially Internet and garbage tech, the same stocks they had just been
bludgeoned with in the 2000-2002 market collapse. Like this rally, the bulk of
the rally occurred in the spring and summer.
Let’s take a look at the statistical resemblance between
these two rallies. The charts below show the gains for the Dow, S&P, and NASDAQ
during the 10½ month Echo Bubble and the gains achieved in half that time during
the 2009 rally.
3/11/2003 1/26/2004
% gain
Dow 7524 10,703 42%
S&P 801 1155 44%
NASDAQ 1271 2154 69%
3/09/2009 8/12/2009
% gain
Dow 6547 9362
43%
S&P 677 1006 49%
NASDAQ 1269 1999 55%
There are a couple of things to keep in mind when analyzing this correlation:
- March 2003 was not the absolute bottom of that era’s bear
market. The bottom had occurred in October 2002. In March 2003, the S&P and
Dow were only a couple of percent above their October 2002 bottoms, but the
NASDAQ was 13% higher in March 2003 than October 2002.
- Once the Echo Bubble came to a close, the market did not
collapse, or even sell off significantly. The market consolidated, trading
sideways or slightly higher the following two years.
- The Echo Bubble occurred in the third year of a
presidential election cycle, traditionally the strongest year for the stock
market. This rally is taking place in the first year of a presidential term,
which is often lackluster for the market.
- In the five months since this rally started, the Dow and
S&P have already exceeded their entire gains of the Echo Bubble. The NASDAQ has
not achieved it's Echo Bubble era performance, but one could attribute that to the
extraordinary behavior of the tech heavy NASDAQ in that era.
How do I interpret this data? I believe the market
transitioned from rally mode to consolidation mode in the past week, after
almost five months of outsized gains with only one significant interruption in
late June/early July. There could be a few more percent of upside left
before a trading top finishes forming. I anticipate the NASDAQ crossing the 2000 level and the
S&P crossing the 1000 level from both directions for many months going forward.
It could take the market a year or two to consolidate these recent gains before
another major rally occurs, setting up for a strong performance in 2011, the
third year of the Obama term. My system tends to be early, I began warning that
the market was getting toppy at the end of July.
Talk about sticking one’s neck out! Yipes...what am I doing?
These are just my perceptions and interpretations, do not interpret them as
gospel. Please also note that I have not called for a market collapse.
“Chasing the Market” July 28, 2009
If you listen to the financial news, you’ve heard the story
the past few days. The market is overbought, and the public and fund managers,
feeling they missed an excellent buying opportunity a few months ago, are
chasing the market, there is a large amount of cash on the sidelines earning
precious little interest....and you too, can and must get in on the chase....in
other words, party almost like it’s 1999.
All the traders or investors I’ve spoken with in the past
couple of days are bullish, even feeling there is somewhat of a guarantee that
the market will continue to move higher. They have pointed to the technical
strength of the market, with the indices breaking above all their moving
averages in the past two weeks or so. That is correct, however, the second
derivative has turned negative (sorry, I couldn’t help myself). I am growing
concerned about the amount of legs left in this rally, (but that was before I
knew it was guaranteed that the market would continue higher). Folks,
there is only one guarantee in the stock market, and that is that there are no
guarantees. By way of mention, the other guarantee espoused (by the media) this
past week has been that if the market should dip, it cannot drop by more than 3%
or so.
There are fewer stocks that are compelling buys at today’s
prices than there were a few months ago when they were in abundance. Perhaps due
to my cheapskate disposition, I like to buy when the sentiment is bearish and
the prices are in the vicinity of lows. Furthermore, we will soon enter the
time of the year that is traditionally the weakest for the market. I typically
do not pay much attention to seasonality, but going into the latter summer in
an overbought market environment is another potential item of concern.
Just an alternate perception to the tone being largely
presented this week.....Be careful out there.
“I’m Nervous” July 23, 2009
I was reminded today of a lyric from an old punk song. “I’m
nervous. I can’t control my shaking and my mind it doesn’t understand my
antics. I’m nervous”.
I am nervous because I am hearing an abundance of
bullishness, almost giddiness, from the financial media this week in the
aftermath of an outlier strong market rally. It is when the market is at it’s
highest levels, the most opportune times to exit instead of enter, that the most
disingenuous scumbags become the most touty, here is what I heard on the Kudlow
Report in the past day or two.
“The Index of leading indicators pointing up”. “Stocks are on
fire”. “Why is President Obama waging war with investors?”. “Great Bull
market.” “Company XXX will blow away their earnings”. “Humungous rally”. This
is the announcer whose tagline for his show in the year leading up to the
greatest, most scandalous, and most manipulative market crash in history was
“The greatest story never told”, in reference the American economy. The other
announcers that followed had similar comments. “You can’t afford to miss this
rally”. “We have the greatest health care in the world”. “Earnings will be
better than expected and will get better”. “Goldman Sachs has turned this market
on its heels”. Yes, this makes me nervous about being too long the stock
market. Perhaps the rally is getting a little long in the tooth?
Yes, I believe March 9th was the “mother of all
bottoms”, and projected that bottom two days prior on this site. The market
climbs a staircase higher, it doesn’t take an express elevator, and I am
concerned that expectations are being set for so much to happen so soon. The
market indices lost about half their value in the six month period from
September 2008 through March 2009. For the market to recover that loss, the
indices would have to double from their bottoms, in other words, go up 100%.
The statistical likelihood of a V shaped 100% run in the following six or seven
months is nil. We are entering the “chasing” mode of this rally, the mindset of
“gotta get in now before it goes higher”, like buying a home a few years ago, is
seeping into the public mindset. Shorts are getting squeezed now, which is
helping propel the market even higher.
Advances like what the market has experienced in the past
dozen sessions are very difficult to sustain longer term, and this one is due to
stall out soon. The NASDAQ has rallied 13% in the past 12 days, every one of
them being an up day. The last time the NASDAQ had 12 consecutive up days was
in January...of 1992 that is. Even God took a rest on the seventh day.
The good news is that the market is a leading indicator,
typically 6 to 9 months ahead of the economy. If the market is correct on this,
it is projecting the recession will bottom out in the fourth quarter and a
rather strong recovery would happen next year. Let’s hope that’s true.
“Strategies for Using Leveraged ETFs” July 11, 2009
Exchanged traded funds have grown tremendously in the past
decade, and at AAM, I have made increasing usage of ETFs in accounts. In the
past couple of years, the number of leveraged ETFs has increased, and various
means for trading leveraged ETFs is the topic of this posting.
Leveraged ETFs strive to match a multiple of a certain index
on a DAILY basis. The key word here is daily. For example, the SSO
attempts to double the performance of the S&P 500 on a daily basis. There are
also inversely correlated leveraged ETFs. RSW and SDS (not Students for a
Democratic Society) are leveraged to mimic 2X a short position in the S&P 500.
The important concept is that over time, the value of both, the long and short
leveraged ETF, will tend to degrade.
Here is an example. Assume an index is trading at 100, then
goes up 10% on day one. It’s value at the end of that day will be 110. On day
two, it drops 9%, making it’s value 100.10. Let’s examine the performance of a
2X leveraged ETF on the same two days. On day one, when the underlying index
increases by 10%, it’s value increases 20%, to 120. The next day, when the
index declines 9%, it drops 18% to 98.4. The daily swings will not be as large
as in this example, but the net effect is that over time the value of the
leveraged ETF, whether long or short, are statistically more likely to decline
than increase.
Here are a couple of ways one could trade the funds without taking a net overall
position in the market:
1. Short an equivalent dollar amount of both, the leveraged
long and short ETF associated with an index. The one that declines should
decline a tiny bit more than the one that increases, yielding a small net
profit.
2. Purchase a specified dollar amount of the underlying unleveraged
ETF and short the reciprocal of that amount of the corresponding leveraged
fund. In the attached article,
http://seekingalpha.com/article/146840-how-to-use-leveraged-etfs-to-your-advantage?source=yahoo,
the author uses the S&P as an example. When the S&P declined 26%, the 2X S&P
ETF declined 58.1%. Having purchased $2 of the S&P index for every $1 invested
in shorting the 2X ETF would have generated a return of 6.1%.
3. Since this is Active Asset Management, efforts to apply
techniques 1 or 2 above with proactive management would be applicable. In this
scenario, the attempt would be to put on the position shorting the long ETF when
the market is higher, or vice versa. There are many hybrids to this approach,
an of course, no guarantee that the timing will be successful.
There are certainly other techniques for trading the
leveraged ETFs. What is key is that for a leveraged ETF to do well over any
extended period of time, the underlying index must sustain a prolonged market
movement in one direction, and the investor/trader who holds a long position
must be positioned correctly. In a sense, one could perceive the leveraged ETF
as a slowly decaying option. For similar reasons, if one is trading leveraged
ETFs from the long side, the positions must be held for relatively short periods
of time, as the ETF is more likely to slowly decline in value as time
progresses.
Another point of mention is that some leveraged ETFs do meet
their defined goal. There are leveraged ETFs that intend to match a multiple of
index, but their performance over time will vary widely from their stated
intention.
"More
on the Dow of the era between World Wars correlating with the current era
NASDAQ" June 24, 2009
I have written on many occasions about the correlation between the
Dow Jones index of the 1920s and 1930s and the NASDAQ of the modern era. The
latter 1920s is very similar to the latter 1990s, October 1929 lines up with
March 2000, September 1932 with October 2002, March 1937 with October 2007, and
the April 1938 low would correspond to March 2009. The super cycle lines up
with a period of approximately 70.5 years +/- one percent in the time
domain.
With the assumption that March 2009 syncs up with April 1938, then
the rally of the past few months, which may have topped out earlier this month,
would correlate to November 1938 (approximately 70.6 years). The market traded
mostly sideways in 1939, which I perceive as a rather likely possibility for
2009. However, I believe there is an increased probability that the correlation
between the two indices, which has held fairly well for the past two decades, is
subject to divergence after this year.
In 1940, Hitler invaded Denmark, Norway, France, Luxemburg, the
Netherlands, and Belgium. Poland had fallen the previous year. With Hitler’s
armies on the march throughout Europe and World War II well underway, the market
went into a swoon, which steepened with the attack on Pearl Harbor, and the Dow
fell below 100 yet again, bottoming in April of 1942. The U.S. entry into WWII
in 1942 was a turning point not just for the war and the world, but for the
markets, which rallied from 1942 through 1946 as the tide turned for the better.
The geopolitical environment of 1939-1946 had a major impact
on the stock market. It is unlikely that geopolitical events will line up
similarly to the 1940s in the next few years, I certainly hope not. For this
reason, I believe there may be increased divergence between the NASDAQ pattern
of the next several years and the Dow of 70 to 71 years prior for the first
time in two decades.
“A Fibonacci Retracement?” June 17, 2009
While recently engaged in the study of the Fibonacci series
mathematics, I decided to do a little Fibonacci retracement analysis on the
market indices as of June 13 relative to their peak in October 2007 and the
August 2008 pre-TARP levels. The indices examined were the Dow, NASDAQ, S&P
500, and Russell 2000.
The Fibonacci retracement levels are 23.6%, 38.2%, 50%,
61.8%, and 100%. This means that stocks will retrace (i.e. go up) that
percentage of the move down they experienced before reversing and going back
down. What I was looking for was essentially a double Fibonacci retracement,
where the index did a Fibonacci retracement relative to the bottom in March to
two high levels, the fall 2007 market high, and the high levels before the steep
crash that began last summer. Here is the data:
index high circa Oct 2007 bottom Mar 2009 June 2009 peak percent retracement
Dow Jones 14,165 6594 8799 29.1%
S&P 500 1565 713 946 27.3%
NASDAQ 2812 1269 1862 38.4%
Russell 2000 856 343 532 36.8%
referenced to the August 2008 pre-TARP peak
index high circa Aug 2008 bottom Mar 2009 June 2009 peak percent retracement
Dow Jones 11,606 6594 8799 44.0%
S&P 500 1305 713 946 39.4%
NASDAQ 2454 269 1862 50.0%
Russell 2000 754 343 550 50.4%
Examining the NASDAQ and the Russell, the 38.2% retrenchment from fall 2007 and
50% retracement from Aug 2008 line up almost perfectly with the high levels of a
week or so ago...very interesting indeed, as it would signal a top in the market
has been reached for the recent upswing. A Fibonacci retracement did not apply
to the Dow and S&P with the dates I selected. Of course, I could probably find a
Fibonacci connection if I retroactively selected my start and end dates
desirably...hey that would make me a Technical Analyst.
The Fibonacci sequence is the sum of the two preceding
terms. As one proceeds further into the sequence, each number is approximately
1.618 times greater than the previous number, which is often referred to the
“golden ratio? The Fibonacci numbers are 1, 2, 3, 5, 8, 13, 21, 34, 55, 89....
The retracements applied to the stock market are found by dividing one number in
the series by the number that is found two places to the right. For example,
34/89 = .382
Leonardo Fibonacci was a great mathematician from the Middle Ages, but
he never envisioned his research being applied to the stock market. What would
Fibonacci think if he were alive today?
"Careful with that Axe Eugene" June 12, 2009
Right now, June 12, 2009, there is a greater likelihood that
the market indices are closer to the top of the market than the bottom for the
year 2009, unless you anticipate the Dow spending the latter part of the year
well above 10,000, which is a very low probability event. Statistically, this
could be interpreted as the highest risk time to increase equity allocation
since last October, although one must take into account that the President of
the U.S. was a retard then.
The same financial entertainers that screamed “Sell” three
months ago are now pounding the proverbial table once again, claiming they
advised you to buy the bottom in March, as they have accurately bought every
bottom and sold every top since before they were born. It concerns me to hear
comments like “A bull market never gives you an opportunity to get in.” The
past few months have been historical, and perhaps, hysterical. We have just
witnessed the greatest percentage gain in the market indices since the 1930s.
Granted, it was in the aftermath of a swan dive and deeply oversold condition,
but it is still record breaking. My concern is that too much too much enthusiasm
has returned to the market too soon, and in a short time, the bearishness that
gripped the market has dissipated, as witnessed by the decline in the VIX and
VXN indicators.
I do believe, as I documented on March 7, that we experienced
a significant market low in March, but a healthy portion of the market ratchet
down in 2008 was necessary to get equity prices more reflective of reality and
risk in the aftermath the Greenspan era speculative asset bubble. I seriously
doubt that Dow 14K is right around the corner.
There is still risk, a lot of it, and the likelihood that we
will return to the Greenspanian credit binging moronicy of the past two decades
is low. The financial collapse of the past year has changed the way Americans
live their financial lives in a way that even the dot-com bust couldn’t do. We
are still mired in difficult economic conditions, and with fed funds rates just
above zero, the Fed has no bullets left in it’s liquidity arsenal, and the
government is resorting to other stimulus programs in an effort to inflate it’s
way out of this crisis.
“A Market of Extremes”
April 12, 2009
I guess we know where the bottom is now. In my last
post, on March 7th, I commented about the excessive bearish sentiment
combined with the oversold market condition, and stated that I felt the bottom
was approaching. Was March 9th the bottom? I’m going to stick my
neck out and say I think that was a significant long term bottom.
The biggest sell off since the 1930s has been followed
by the greatest advance in the market since the 1930s. Is that enough
volatility for investors?...talk about a market of extremes. We have exploded
off the bottom, so where does that leave us now, one month later?...I’d say
short term approaching overbought. With the volatility we are experiencing, there will be
opportunities to buy again, like there was a month or so ago. The fear that
gripped the markets a few weeks ago has dissipated. From my perspective, the
prudent investor is reducing equity exposure or hedging at today’s levels, with
an eye on having cash available to buy when bargains reappear. Perhaps the only
given during these stressful times has been the volatility, it’s not too
unreasonable to expect there to be periods of high volatility going forward.
By way of mention, when oil dropped to $34/barrel at
the beginning of this year, I called for it to double to almost $70 by the end
of this summer. Oil has been trading in the low $50s for the past couple of
weeks, and it looks like my call is on it’s way to coming to fruition.
“Getting Mighty Crowded” March 7, 2009
I just read a blog from a prognosticator who had been
calling the bottom for the past year, claiming that Dow 13,000 and every stop
below that was the greatest buying opportunity in a generation, and that when
oil broke above $100, it was only a stepping stone on it's rise to $200. Now he
has turned bearish. We may not have reached capitulation yet, but it is
approaching. At current levels, I no longer hold a bearish outlook the direction of the markets over the next several years, primarily because it is getting
mighty crowded on the bears side. Everyone is falling all over each other
trying to claim they called this disaster, the usual blowhards screaming “I told
you so”, although of course they didn’t.
Every day is not Christmas, nor is it 9/11. The markets
have glimpsed around the corner into the future, and it is ugly, make that, very
ugly. Dow 6600, S&P 670, Russell 360, represent 55-60% declines from their highs
18 months ago, while the NASDAQ is one-fourth of what it was at it’s zenith. Dow
14K and S&P 1500 look like Mount Whitney and NASDAQ 5000 looks like Mount
Everest from here, as they should. We became so accustomed to equity prices not
reflecting the inherent risk and volatility associated with them that the
commonly held perception became that not being invested in the market was the
risky approach.
Are we in for a world of hurt over the next several
quarters?...Oh yeah. The question is, what has the market priced in? The public
has become negative, bearish, and mistrusting of the banks and financial
institutions. I believe a pretty bad scenario is priced into the equity markets
at these levels. More bad news is expected, should the news be just less bad
than anticipated, the markets could move higher. No doubt, there has been a
massive change in psychology, the realization that the speculative financial
behavior of the past couple decades has left a big mess that will take many
years to clean up is publicly known. I am not predicting a return to the
silliness of what got us here, I doubt I will live to ever see NASDAQ 5000
again. There will be opportunities to trade the market again from the long side,
and the buying opportunities will come when the sentiment is most negative. The darkest hour is always just before the dawn.
“Here We Are in the Years” February 28, 2009
Back in November, when the Dow jumped 900 points
intraday, I warned that it was too early to rejoice, that the market could
easily drop 15 or 20% from that level before finding a sustainable bottom, which
it now has. Could we drop another 10 or 15%. Yup. Do I know where the bottom
is? Nope. What I do know is that the market has gotten oversold again, and I
believe there is a decent possibility of a sharp short term market rally off the
oversold condition. I’m going to stick my neck out on the proverbial limb and
say that the markets are much closer to the bottom than the top. Someone asked
me if the market indices could actually drop to zero? Theoretically it is
possible, but it would probably require a complete collapse of the economic
system and a nuclear exchange to get to that point. The drops we have
experienced in the past few quarters are the steepest ever recorded. Nine years
after it’s delirious peak, the NASDAQ sits at 28% if it’s March 2000 level. In
the past year and a half, the Dow, S&P, and Russell have lost more than half their
value. How low is low? Given the magnitude of the upswing during the delirium,
we do not have to just correct, but overcorrect on the downside. Have we done
that yet?
This is a sea change, the greatest change to our economic system
in 70+ years. The great asset and credit bubble, allowed to run unchecked for
more than two decades, is finally is the heepbin of history. Perhaps most
important is the psychological blow to the socioeconomic structure. Everybody
knows they’ve been had. The whole scam of IRAs, 401K, put your money into
markets, blah, blah has devastated the retirement and financial stability of
more than a generation of Americans, who wish they just could have the money
they pumped into the “investment” marketplace back...with zero return.
The U.S government was supposed to invulnerable, but we
were not supposed in the predicament we are in, where we will have a national
debt that is almost equal to our annual GDP, many municipalities and large
corporations on the brink of insolvency, and interest on the debt that is
stifling. Americans transformed themselves from a nation living on a decades
long credit and consumer driven spending orgy into a nation of net savers during
a recession in a matter of months. Sentiment is negative, and for good reason.
January 21, 2009
Just about a month ago, I mentioned that we should prepare to
say goodbye to sub $2 gasoline. In my SoCal neighborhood, it’s already
difficult to find gas at the pump below $2, except for the lowest grade. I
expect that it will gone altogether in few weeks, and the rest of the country
will follow a few months later.
January 15, 2009
I saw Bush 41 on TV saying it’s not fair that W gets the
blame for what has transpired during his administration. I am not going to
attack Bush personally or engage in name calling. The reality is that Bush
built the Imperial presidency, never before in American history had so much
powered been concentrated in the Executive branch.
In the face of national and international public opposition,
Bush pushed through policies that met with overwhelming public disapproval,
dissenting opinions were dismissed if even tolerated. Where George Bush
stifled positions or information that opposed his staunch positions, Barack
Obama welcomes a multitude of viewpoints, including those which are different
from his.
I have lived through the JFK assassination, Vietnam,
Watergate, the Iranian embassy occupation and other dark hours in American
history. Those were the glory days compared to today. This country has been
screwed up big time, this is the worst since the Depression. The icing on the
cake, the economic collapse of the past year, was not just man made, it was
American engineered. Administrations do have cultures or personalities which
set a tone for others in positions of power in the U.S., and there is no denying
what ran rampant in the highest levels of the American power structure in recent
years.
His frustration shows, never in history has a sitting
president given up so much power to an incoming president in the weeks prior to
inauguration. He made have had high intentions, but the failure is massive, and
George Bush does need to “cowboy up” and shoulder the responsibility. Our
country is in the worst predicament of my lifetime, and we dragged most of the
world into it with us. When George Bush was reelected in 2004, he stated, “
I've earned capital in this election -- and I'm going to spend
it”.....and he did.
“TARP
This” January 9, 2009
The verdict is on the TARP plan, and calling it an abysmal failure would be an
undeserved compliment. The plan was supposed to be transparent, but
inquire from any financial institution what they have done with the money and
the institutions reply with the single finger salute. The TARP, with it’s $150B
of attached pork, was the single greatest act of financial thievery in history.
Now there is discussion of a financial stimulus plan in the vicinity of a trillion
dollars. Of course, a couple hundred billion of that will be pork for the most
incestuous and unnecessary projects. The bulk of what’s left will be embezzled
or misappropriated to the upper .0001% of America’s richest by paying $20M for
one week’s worth of consulting or some other scheme.
The government has only one way to stimulate the economy and that is to reduce
taxes, and to do so with any financial prudence requires reducing spending,
which is anathema to our government’s mindset. There is no reason for tax rates
to rise as our economy grows, if anything, rates should drop with economies of
scale.
This Bushonian socialistic version of corrupted capitalism takes from the poor,
middle class and rich and gives to the ultra rich. What is perhaps most troubling is
the mentality that the assets and income of the citizenry no longer belong to
the citizen, but are subject to multiple taxation by the government, with
exemptions of course for large amounts of money obtained through financial
swindle and corruption.
Not one penny of benefit from the TARP swindle has been demonstrated, or even
accounted for. Henry Paulsen flat out lied to the American public, why
isn't the public enraged? The only thing that surprises me is that the public is not more
irate, and demonstrating their displeasure more vocally to our government, while
they have taken to the streets in European countries where the government has
not committed the outrageous offenses ours has.
"Oil Doubling?" January 3, 2009
A few weeks ago, CNBC tickers had oil trading below $34/barrel for a day or so,
although it may have been an erroneous quote. What I am calling for is a
double from that level, to $70/barrel or higher, and I am calling for it to
happen by the end of this summer (2009).
Oil took a disproportionate hit during the financial debacle in the second half
of 2008. I believe the secular bull market in oil and commodities, which
started around the beginning of the new millennium, has another decade or so to
run. Let me clarify, by bull market, I am speaking in relative terms; I
expect to the oil sector to outperform other market sectors and the markets in
general.
Although there were periods of volatility due to geopolitical turmoil, the
price of oil and gas at the pump did not keep up with the rate of inflation in
the past half century. The rise in the price of oil was overdue, it just
got overdone during the speculative fervor of 2007-2008, and became similarly
oversold last month. While gas at the pump costs 5 to 6 times what it cost
40 years ago, the automobile it goes into costs 8 to 10 times as much, as do the
homes people live in and most other items.
I believe we saw the bottom in oil prices last month when oil was in the mid
30s. Oil closed yesterday at $46.89, already a big bump. Enjoy the
sub $2/gallon prices at the pump, they won’t last much longer. By this
summer we’ll be well into the 2s, and the days of a dollar something a gallon
will be a pleasant memory that won’t be revisited.
Almost every stock
in the oil sector has been beaten severely. If you want to invest in the sector
without selecting individual stocks, I believe there is a good entry point for
the XLE ETF in the 40s and the OIH in the 70s.
"Cheap Gas" December
19, 2008
If you had told me in July, when I saw gas at $4.99/gallon near my home, that I
would paying $1.77 per gallon just five months later, I would have said, “yeah
sure, and the governor of Illinois will try to sell Obama’s senatorial seat for
$1.5M and the founder of the NASDAQ will be arrested for running a $50B Ponzi
scheme.” OK, bad examples.
The drop in
the stock and real estate markets has been dramatic, but the drop in the price
of crude oil, from over $145 per barrel to just $34 today, has been stunning,
more than a 75% decline in just five months. When oil was trading in the $140s,
the consensus opinion was that $200 was right around the corner. With oil now
in trading in the 30s, the wise men are calling for teens and proclaiming that
oil will remain depressed along with the rest of the economy and it’s
inhabitants.
I would be
glad to continue paying sub $2/gallon going forward, it would be like the 1990s
again, but that’s not very likely. The steep decline in the price of oil was
the collapse of yet another speculative bubble that was accelerated due to
extraordinarily harsh economic conditions. My perception is that gas at the pump
is in the general vicinty of, or approaching, the lower end of it’s pricing
levels.
What Took
So Long? November 13, 2008
Some who
know me perceive, although incorrectly, that I am perpetually short market.
This perception arose from my vocal conviction that the NASDAQ bubble of the
late 90s would end in the tech market collapsing. When the
NASDAQ hit 5000 in 2000, I made a bet with a friend that the NASDAQ would be
below 1432 within three years. I also stated that it would be a minimum of 20
years, and probably significantly longer, until the NASDAQ would see 5000 again.
Perhaps I was too optimistic? During the
Echo Bubble of 2003-2004, I held several short positions and got squeezed hard.
It was not fun. I had never seen a dead dog get up again and start barking, but
it happened then.
I fully
expected the real estate market collapse of the past year, I just
thought it would happen sooner. It never ceases to amaze me how big these
bubbles inflate before they collapse. Just like the Internet bubble ended as it
did, there was no way the real estate/sub prime/CMO bubble could end other than
complete collapse. We are experiencing the unwinding of the great Greenspan
Asset Bubble as a result of his disastrous tenure as Fed chairman.
The market
has become oversold, but have we hit bottom and are we heading back up now with
Dow 8835, S&P 911, NASDAQ 1597? I doubt it. I do not view today’s intraday turn
around in the market as the bottom, not with so many screaming how great a
buying opportunity it is. Do I know where the bottom is? Of course not. The market could
fall another 15 or 20% before we hit a sustainable bottom. We are experiencing
the most enormous change to our financial structure in 70+ years, and the
ability, integrity, credibility, and morality of our leadership is pathetically
low.
Remember Harry Dent, the buffoon who wrote The Roaring 2000s in late 1999, calling for Dow 40K and NASDAQ possibly 20K in 2008? Well get this, now he is about to release a new book, The Great Depression Ahead. In this book he calls for the collapse of stock, real estate, and commodities markets....after it’s happened!