Bernanke's reappointment turned out to be a non-event. If he didn't get reappointed however I think it would have made things a whole lot worse today. The situation right now in the market is interesting. We are quite oversold but still finding a way to sink lower. That’s indicative of a weak market. Once again, the action in the VIX suggests complacency. The VIX only being up 2.5% today on such a solid down day is not good for the bulls. It was at one point on Thursday showing some fear but all it took was a modest intraday rally to quickly collapse it once again showing that there’s too much hope for a bottom. The put/call ratio wasn't high either today also confirming the lack of fear. Tonight's data shows that rydex traders are still stubbornly not capitulating enough. It's getting there though....I think another stab lower and they will give up the ghost. It's also possible they will sell heavily into the first rally off the bottom thus issuing a strong buy signal after the bottom is in but until there's evidence of that it would be wise not to jump the gun.
We were overdue for a weak market like this and as I pointed out before this correction began, a consolidation phase to the bull market was imminent. In my view, this correction is the undoing of the reckless bullish behavior of the fast money crowd such as option speculators who got too comfortable with the uptrend aggressively buying calls since about late November. I warned back in November and December about bearish omens gathering in the market and how in bull markets such omens could be ignored for a while before bearing fruit due to seasonality and other factors. It took a while for the correction but here it is. All it took was for some political uncertainty to do the trick.
But wait....is there perhaps a bigger issue that the market is warning about but hasn't showed itself yet? A silent killer if you will? It's certainly possible. That’s why this game is hard and so fascinating. You can only speculate as to what you think will unfold based upon experience and intuition. We all know the dozens of worries that are out there. But take a step back for a moment and pull up a 1 or 2 year chart. Can you honestly say that after such a strong run this dip makes this run look "broken"? Remember, it was only 9 days ago that the market was at a 52 week high and again I must stress the market was up 70% in 10 months!
Bottom line: We probably need to see more fear before the bottom of this slide is in. I suspect the action is going to be very whippy in the coming days and a dead cat bounce can happen anytime now but for me to pull the trigger on an index trade I want to see the dust settle and wait for the "all in" signal. Market action always trumps any signals or indicators and it's my style to see evidence of the market confirming what I suspect might play out before pulling the trigger because I could very well be wrong in my thesis. This can sometimes lead to whipsaws but more often than not; it's the safer higher percentage way to play things.
Thursday, January 28, 2010
The missing links. Is this about Bernanke?
Well, so much for the "moderate buy signal". There was a reason I gave it a moderate buy as opposed to the "all in" buy and that's because of some missing links. As I mentioned a couple days ago, the VIX although showing fear earlier when it spiked to 27, collapased very quickly on just the slightest of bounces which was indicating complacency (but now it's spiking again). Also, as mentioned before, Rydex indicators are not all on board (although a couple are). I would also like to see more pessimism from AAII sentiment figures. The current figures this morning showed a 1:1 ratio of bears vs bulls. I was a bit suprised by this because during the past 10 months a 5% drop usually caused more pessimism. The fact that the ratio is "only" 1:1 indicates a bit of complacency although it's not dangerous complaceny by any means. At prior "all in" buy signals (July and November lows) we saw a ratio of about 2:1 bears vs bulls.
So, in conclusion I will give props to the bears here for taking the market down even though there was some big oversold signals. I'm begining to wonder if the real concern about the market is about the re-apointment of Bernanke which appears will be decided shortly after 3:20. I think it would be a negative if he's not. Apprently, odds suggest he will be reapoined but is the market suggesting no or is this just panic selling? We're going to find out soon.
So, in conclusion I will give props to the bears here for taking the market down even though there was some big oversold signals. I'm begining to wonder if the real concern about the market is about the re-apointment of Bernanke which appears will be decided shortly after 3:20. I think it would be a negative if he's not. Apprently, odds suggest he will be reapoined but is the market suggesting no or is this just panic selling? We're going to find out soon.
Wednesday, January 27, 2010
Moderate buy signal issued
First off, I believe there are enough indicators giving the green light for a rally here. I wouldn't call it an "all in" buy signal but it's a buy signal nonetheless. Will it be a V bottom or some sort of W bottom whereby we rally and then retest the lows or make a slightly lower low in early February? Who knows? Calling every wiggle is a guessing game. All I know is that bulls have the green light. A rally and then retest or lower low in Feburary would likely usher in the "all in" buy signal.
I've been saying since the spring that this bull run is a Rodney Dangerfield market -it gets no respect and it still hasn't. The host of a popular bearishly biased blog I follow (which will go unnamed); who back in the summer said he was going to make a fortune shorting the market in the fall, now says this
"I will close by stating what I've stated many times during the past few days - - - a push higher by the bulls (which perhaps kicked off during the latter part of Wednesday's post-FOMC trading) would be happily embraced by me. I am watching the major indexes and biggest ETFs for what I consider to be important thresholds, and I will start scaling back into shorts as those levels are approached. I consider the March 2009-January 2010 rally to be permanently broken at this point, and I intend to not only push my commitment to my entire cash on hand, but - - if the stars line up as I hope - - dip, for the first time, into my margin buying power."
He considers the rally to be permanently broken after a 5% dip from its high after a rip roaring 70% move in 10 months? lol! That's quite a bit of arrogance coming from someone who has been on the wrong side of the market most of the way up. The same person who in the summer said he was going to make a fortune with shorts come the fall. Not only is this guy willing to go all in short...he is willing to go all in + margin! People like this need to show some humility. When you've been wrong for months on end in such a big way it's often best to regroup and instead of being bold you should just STFU. Being bold and stubborn like this is a symptom of wounded pride and a lot to today's bears are like him. Pride will be your undoing in this game unless you do like Pretcher and just write newsletters forecasting the end of the world every year (24 and counting) to fish in the unsuspected suckers who are probably miserable with their own lives.
The funny thing about this particular guy I've referenced above is that all throughout the past several months after getting burned time and time again picking tops and shorting bounces he tried to come clean a few times saying he's learned his lesson but he never did. All it took was a little dip for his bearish bias to get the better of him.... like a crack addict who can't kick the habit. I'm waiting for enough guys like this to throw in the towel and swear never to touch the short side again....and actually mean it. That's when the 2nd or 3rd phase of the bull market will be underway.
Again, like I said before....bulls are running scared while bears are getting very bold after just a routine 5% dip which is quite common in bull markets especially one that has made a 70% move in 10 months! This is a recipe for an upward surge to new highs.
Maybe I sound a bit arrogant myself here but I don't mean to. If the market rolls over into a decisive downtrend and breaks 975 or thereabouts I would likely admit that the bear has indeed taken back control of this market. Here's the thing....if the bears are right and we are going to retest or break the March lows then there will be plenty of time and money to be made on the short side on the way down from here. Why not wait until the market has clearly rolled over before going short? Who gives a fuck if you miss the first 10-20% of the move down? Think about if you missed the first 20% of this bull market and then hopped on. You still would have done very well for yourself and in a rather painless, instantly gratifying way with the wind at your back.
I've been saying since the spring that this bull run is a Rodney Dangerfield market -it gets no respect and it still hasn't. The host of a popular bearishly biased blog I follow (which will go unnamed); who back in the summer said he was going to make a fortune shorting the market in the fall, now says this
"I will close by stating what I've stated many times during the past few days - - - a push higher by the bulls (which perhaps kicked off during the latter part of Wednesday's post-FOMC trading) would be happily embraced by me. I am watching the major indexes and biggest ETFs for what I consider to be important thresholds, and I will start scaling back into shorts as those levels are approached. I consider the March 2009-January 2010 rally to be permanently broken at this point, and I intend to not only push my commitment to my entire cash on hand, but - - if the stars line up as I hope - - dip, for the first time, into my margin buying power."
He considers the rally to be permanently broken after a 5% dip from its high after a rip roaring 70% move in 10 months? lol! That's quite a bit of arrogance coming from someone who has been on the wrong side of the market most of the way up. The same person who in the summer said he was going to make a fortune with shorts come the fall. Not only is this guy willing to go all in short...he is willing to go all in + margin! People like this need to show some humility. When you've been wrong for months on end in such a big way it's often best to regroup and instead of being bold you should just STFU. Being bold and stubborn like this is a symptom of wounded pride and a lot to today's bears are like him. Pride will be your undoing in this game unless you do like Pretcher and just write newsletters forecasting the end of the world every year (24 and counting) to fish in the unsuspected suckers who are probably miserable with their own lives.
The funny thing about this particular guy I've referenced above is that all throughout the past several months after getting burned time and time again picking tops and shorting bounces he tried to come clean a few times saying he's learned his lesson but he never did. All it took was a little dip for his bearish bias to get the better of him.... like a crack addict who can't kick the habit. I'm waiting for enough guys like this to throw in the towel and swear never to touch the short side again....and actually mean it. That's when the 2nd or 3rd phase of the bull market will be underway.
Again, like I said before....bulls are running scared while bears are getting very bold after just a routine 5% dip which is quite common in bull markets especially one that has made a 70% move in 10 months! This is a recipe for an upward surge to new highs.
Maybe I sound a bit arrogant myself here but I don't mean to. If the market rolls over into a decisive downtrend and breaks 975 or thereabouts I would likely admit that the bear has indeed taken back control of this market. Here's the thing....if the bears are right and we are going to retest or break the March lows then there will be plenty of time and money to be made on the short side on the way down from here. Why not wait until the market has clearly rolled over before going short? Who gives a fuck if you miss the first 10-20% of the move down? Think about if you missed the first 20% of this bull market and then hopped on. You still would have done very well for yourself and in a rather painless, instantly gratifying way with the wind at your back.
Amazing what a 5% drop does
"Like its 2008 All Over Again". This was the headline from one of Cramer's articles tonight. Anyone reading that headline who wasn't aware of what the market has been doing these past couple of months would have been made to believe that we were in the midst of a crash. Cramer proves my point when I say that any hint of trouble makes bulls run for the hills. And look how excited all of the bears are getting! I don't get to watch CNBC anymore but apparently good ole Robert Pretchter was featured today as he's calling for the end of the world (again). I'm not going to bother wasting too much time talking about this clown again. Anyone who's been long term bearish since 1986-1987 when the SPX was around 300 and remained stubbornly bearish during the biggest and longest bull market in history has zero credibility in my book. I don't give a shit if he called this latest crash. A broken clock is right twice a day as they say and if you listened to this guy for the past 20+ years you would be broke several times over.
All of this hoopla and for what? A 5% drop from the recent high? Even a 10% drop doesn't prove a thing for the bears. Most have been getting their asses handed to them basically since SPX 850 or thereabouts where they believed the rally was going to lose steam.
The psychology out there is fascinating. Bulls are quick to run for cover because deep down inside they still have some doubts and worry about this being just one big sucker's rally because the economy although improving is fragile (I know I have my doubts). Bears on the other hand have been holding strong in their convictions all the way up since March. I see very little in the way of humility from them after getting embarrassed and losing money for so long. Now that the market drops 5% they are jumping up and down like lunatics with a "see I told you so!" attitude. These guys are so delusional and clearly suffering from ego damage. They are celebrating that the market is down 5% after a 70% 10 months rally! If only they can see how pathetic they look.
Now look, don't get me wrong. I'm no permabull. Back in late 2000 I was as bearish as they came....my dad would call me Mr. Negative. That's when being bearish was unpopular and uncomfortable. I would bash retail permabulls like I've been bashing the permabears of today. It was tough for anyone to imagine after the 1990s that there could be a big bear market. Every crisis in the 1990s was dealt with swiftly and with little pain relatively speaking. People were conditioned to buy on the dip. Now we've come full circle. Now, every uncertainty that comes around makes it easy for people to worry about another 2008-like debacle. It seems like we will never get out of his hole. The thought of the economy returning to consistent and steady job growth takes a big leap of faith doesn't it? Buy and hold is clearly dead. The consensus is that you would be an idiot to do such a thing....Full circle indeed.
Anyhow, enough of the philosophical ranting and on to the market action. We got a weak bounce followed by a retest of the lows today. Could this be enough to put in the bottom? Well...I'm still not getting the "all in" buy signal. However, the market is certainly oversold now to get a really nice bounce.
On the bullish side of the ledger, the market is very ST oversold...right around where current ST bottoms have been seen.
In addition, the put/call ratio continues to climb, bonds yields are dropping and a couple of rydex indicators (but not all) are giving the green light.
On the bearish side of the ledger, market action is weak. We couldn't even get much of a bounce despite already oversold conditions so far. Also, although the VIX spiked quite a bit recently indicating a surge if fear, it collapsed very quickly on Tuesday....too quickly even though the market ended the day in the red. That's a sign of complacency to me.
I think we are in the situation where it's too risky to short and too risky to go long in the ST. I still think the market will need to do a bit of base building and I'm still looking for a clear cut buy signal to get interested in playing the indices for a trade. Until then I will continue to do research on stocks which are showing nice charts "dancing to their own tune". Drops like this in the market provide a good test to see how resilient and non-market correlated your stocks are. If they can hold up well it's a sign of strength. Fortunately for me that has been the case for my portfolio as a whole but I realize that this can change on a dime and if we get another 2008 like panic all bets are off.
All of this hoopla and for what? A 5% drop from the recent high? Even a 10% drop doesn't prove a thing for the bears. Most have been getting their asses handed to them basically since SPX 850 or thereabouts where they believed the rally was going to lose steam.
The psychology out there is fascinating. Bulls are quick to run for cover because deep down inside they still have some doubts and worry about this being just one big sucker's rally because the economy although improving is fragile (I know I have my doubts). Bears on the other hand have been holding strong in their convictions all the way up since March. I see very little in the way of humility from them after getting embarrassed and losing money for so long. Now that the market drops 5% they are jumping up and down like lunatics with a "see I told you so!" attitude. These guys are so delusional and clearly suffering from ego damage. They are celebrating that the market is down 5% after a 70% 10 months rally! If only they can see how pathetic they look.
Now look, don't get me wrong. I'm no permabull. Back in late 2000 I was as bearish as they came....my dad would call me Mr. Negative. That's when being bearish was unpopular and uncomfortable. I would bash retail permabulls like I've been bashing the permabears of today. It was tough for anyone to imagine after the 1990s that there could be a big bear market. Every crisis in the 1990s was dealt with swiftly and with little pain relatively speaking. People were conditioned to buy on the dip. Now we've come full circle. Now, every uncertainty that comes around makes it easy for people to worry about another 2008-like debacle. It seems like we will never get out of his hole. The thought of the economy returning to consistent and steady job growth takes a big leap of faith doesn't it? Buy and hold is clearly dead. The consensus is that you would be an idiot to do such a thing....Full circle indeed.
Anyhow, enough of the philosophical ranting and on to the market action. We got a weak bounce followed by a retest of the lows today. Could this be enough to put in the bottom? Well...I'm still not getting the "all in" buy signal. However, the market is certainly oversold now to get a really nice bounce.
On the bullish side of the ledger, the market is very ST oversold...right around where current ST bottoms have been seen.
In addition, the put/call ratio continues to climb, bonds yields are dropping and a couple of rydex indicators (but not all) are giving the green light.
On the bearish side of the ledger, market action is weak. We couldn't even get much of a bounce despite already oversold conditions so far. Also, although the VIX spiked quite a bit recently indicating a surge if fear, it collapsed very quickly on Tuesday....too quickly even though the market ended the day in the red. That's a sign of complacency to me.
I think we are in the situation where it's too risky to short and too risky to go long in the ST. I still think the market will need to do a bit of base building and I'm still looking for a clear cut buy signal to get interested in playing the indices for a trade. Until then I will continue to do research on stocks which are showing nice charts "dancing to their own tune". Drops like this in the market provide a good test to see how resilient and non-market correlated your stocks are. If they can hold up well it's a sign of strength. Fortunately for me that has been the case for my portfolio as a whole but I realize that this can change on a dime and if we get another 2008 like panic all bets are off.
Saturday, January 23, 2010
What a correction looks like
Just as I suspected, this dip in the market has bulls running for the hills and the bears orgasmic which to me confirms that it's just a correction. No bear market begins this way. This behavior has been evident every time the market has dipped during the past 10 months. Throughout the past several months I've been saying that this bull run has been the most hated one I ever seen. Most of those who panicked during the crash missed out on the rebound or even worse, shorted it, those who did short have been slaughtered like swine but haven't capitulated unless by force and plenty of those who are bullish are weak and quick to run for the hills at the first sign of trouble. That's wall of worry action for you.
Take a look at Jim Cramer's site realmoney.com. Here are some of the headlines "this dip cannot be bought" "major break in uptrend". The financial post this weekend has a picture a bull behind bars with the title "TAMED" in big bold letters. "the thrill is gone" is the title of an article underneath it. Meanwhile the bears that dominate the yahoo message board are in frenzy....the same amateur losers have been getting mauled so badly for months showing zero humility.
Based upon the headlines and excitement from the bears you would figure that the market took a 20% dive. Yet all we have seen is a 5% drop on flimsy excuses after a 70% run . Meanwhile this drop has resulted in a super spike in the VIX to overbought levels which were what we saw at all prior correction lows.
If you look at the pricing of VIX options you will see that the puts carry a substantial premium to calls meaning VIX traders expect the VIX to fall in the coming weeks. I noticed the same thing happened in early November. These VIX traders tend to be "smart money"
Complacency has turned to fear very quickly. Since December I have been describing the market as having a running on fumes feel to it....well, it now has a full tank of gas.
Now, typically after a substantial decline like this you get a reflexive bounce followed by a retest or lower low. I suspect something like this will happen. Admittingly, traders were aggressively buying calls for several weeks prior to this drop (and they got spanked according), therefore, we may have to see some of the opposite behavior for a week or 2 at least before any sustained rebound occurs which argues for some base building. Put buying is already on the rise given the high put/call ratio of 1.07 on Friday which has typically signaled a ST bottom.
The multi-month consolidation phase I was calling for may have very well begun but don't rule out a move to 1150-1200 because we now have the gas in the tank to get there. I'm not going to try and guess how every wiggle is going to play out. What I'm quite sure of however, is that this is a correction and not the start of something nasty a la 2008 even if we go a bit lower from there. If the evidence changes so will I.
The easy money in the indicies has been made. After a 70% run in 10 months, you can't expect that sort of pace to continue forever. Those who are warning about bad things to come just because the 10 month uptrend since March is broken are quite frankly idiots. How can anyone expect that type of uptrend to be sustainable? As I pointed out a few times already, every bull market of the modern era has had a consolidation phase after the first 10-12 months of its onset.
The market needs a well deserved rest and a sideways choppy market is what likely lies in store for the next several months. This suggests that it will be a stock pickers market and that's the strategy I continue to use. If I get the "all in" buy signal like I saw in early November I'll post it. We're almost there already....
Take a look at Jim Cramer's site realmoney.com. Here are some of the headlines "this dip cannot be bought" "major break in uptrend". The financial post this weekend has a picture a bull behind bars with the title "TAMED" in big bold letters. "the thrill is gone" is the title of an article underneath it. Meanwhile the bears that dominate the yahoo message board are in frenzy....the same amateur losers have been getting mauled so badly for months showing zero humility.
Based upon the headlines and excitement from the bears you would figure that the market took a 20% dive. Yet all we have seen is a 5% drop on flimsy excuses after a 70% run . Meanwhile this drop has resulted in a super spike in the VIX to overbought levels which were what we saw at all prior correction lows.
If you look at the pricing of VIX options you will see that the puts carry a substantial premium to calls meaning VIX traders expect the VIX to fall in the coming weeks. I noticed the same thing happened in early November. These VIX traders tend to be "smart money"
Complacency has turned to fear very quickly. Since December I have been describing the market as having a running on fumes feel to it....well, it now has a full tank of gas.
Now, typically after a substantial decline like this you get a reflexive bounce followed by a retest or lower low. I suspect something like this will happen. Admittingly, traders were aggressively buying calls for several weeks prior to this drop (and they got spanked according), therefore, we may have to see some of the opposite behavior for a week or 2 at least before any sustained rebound occurs which argues for some base building. Put buying is already on the rise given the high put/call ratio of 1.07 on Friday which has typically signaled a ST bottom.
The multi-month consolidation phase I was calling for may have very well begun but don't rule out a move to 1150-1200 because we now have the gas in the tank to get there. I'm not going to try and guess how every wiggle is going to play out. What I'm quite sure of however, is that this is a correction and not the start of something nasty a la 2008 even if we go a bit lower from there. If the evidence changes so will I.
The easy money in the indicies has been made. After a 70% run in 10 months, you can't expect that sort of pace to continue forever. Those who are warning about bad things to come just because the 10 month uptrend since March is broken are quite frankly idiots. How can anyone expect that type of uptrend to be sustainable? As I pointed out a few times already, every bull market of the modern era has had a consolidation phase after the first 10-12 months of its onset.
The market needs a well deserved rest and a sideways choppy market is what likely lies in store for the next several months. This suggests that it will be a stock pickers market and that's the strategy I continue to use. If I get the "all in" buy signal like I saw in early November I'll post it. We're almost there already....
Thursday, January 21, 2010
Ignore the minutia and keep your eye on the big picture
According to the financial media today's sell-off was apparently due to Obama's plans to regulate banks so they can't do prop trading. This is weak excuse. The other explanations are the news about how China is planning to curb bank lending and the surprise election of Republican Scott Brown. Weak and weak. All this minutia is good for is an excuse to cause a correction. The market has rallied 70% in 10 months while traders were getting complacent given the low VIX and put/call ratios. This makes the market susceptible to selling off on any sort of excuse. These sorts of excuses do very little to derail the major trend in place.
I remember back at the November 2008 bottom the market rallied massively from the low point when it was announced that Geitner was elected as the new Treasury secratary which was not even a surprise given that he was favored to be the selected. But the market was so oversold and traders were leaning to the short side so heavily that this flimsily excuse was all it took to spark massive short covering. Eventually that rally, although impressive and multi-week, failed and a new (and final) low was reached in March 2009.
When it comes to the major trend it's all about earnings folks nothing more which means it's all about the health of the economy which drive earnings. Are earnings growing or poised to grow at a healthy clip? That's what you need to know. Are the above news items going to put a serious dent in earnings growth? Highly doubtful. The only type of news you should pay attention to is economic news directly related to earnings. Prop trading restrictions may affect firms like GS but what % of GDP is made up of prop trading by banks? Besides, firms like GS can simply de-bank to get around this or find some other way around it I'm sure. What effect will the election of Republican Scott Brown have on the $77 EPS estimated for the SPX this year or EPS in the future years? Close to Zilch. China curbing banking? Ok, that's probably the only news item that's worth paying attention to. Sure, this is counter cyclical to earnings growth in China but how much? Once an economy is gathering steam in either direction it takes a significant amount of counter cyclical policy and time before this trend is reversed. The China news seems like a baby step from what I can tell.
I can already see the bears getting euphoric yet again on just the smallest of dips and any trader complacency that’s out there is quickly getting extinguished with the VIX surging 19%. I've noticed the same stubborn top picking retail traders who have been getting their asses handed to them for months on end celebrating in victory today because they finally got one right. This is the worst thing that could happen to them because it keeps their hopes alive giving their crippled accounts another life line. I'm waiting for the day when all these jokers I'm tracking stop posting or openly admit they are quitting. One by one its happening and I've posted such confessions here.
So, have we in fact started the consolidation phase that I've been calling for? Perhaps but I still think there's going to be a least another stab at 1150 and possibly a bit higher. I really don't care as I've been focusing on my attention on individual microcap/small cap stocks that have minimal day to day correlation with the general markets. I will become interested in an index trade if there's a really good IT setup up and quite frankly there hasn't been one since November 2 and since I've vowed never to intraday trade again I haven't bothered playing the general markets for quite some time. Last year my attempts to trade intraday were a waste of time and effort. I basically broke even doing that which is probably better than what most people do.
I remember back at the November 2008 bottom the market rallied massively from the low point when it was announced that Geitner was elected as the new Treasury secratary which was not even a surprise given that he was favored to be the selected. But the market was so oversold and traders were leaning to the short side so heavily that this flimsily excuse was all it took to spark massive short covering. Eventually that rally, although impressive and multi-week, failed and a new (and final) low was reached in March 2009.
When it comes to the major trend it's all about earnings folks nothing more which means it's all about the health of the economy which drive earnings. Are earnings growing or poised to grow at a healthy clip? That's what you need to know. Are the above news items going to put a serious dent in earnings growth? Highly doubtful. The only type of news you should pay attention to is economic news directly related to earnings. Prop trading restrictions may affect firms like GS but what % of GDP is made up of prop trading by banks? Besides, firms like GS can simply de-bank to get around this or find some other way around it I'm sure. What effect will the election of Republican Scott Brown have on the $77 EPS estimated for the SPX this year or EPS in the future years? Close to Zilch. China curbing banking? Ok, that's probably the only news item that's worth paying attention to. Sure, this is counter cyclical to earnings growth in China but how much? Once an economy is gathering steam in either direction it takes a significant amount of counter cyclical policy and time before this trend is reversed. The China news seems like a baby step from what I can tell.
I can already see the bears getting euphoric yet again on just the smallest of dips and any trader complacency that’s out there is quickly getting extinguished with the VIX surging 19%. I've noticed the same stubborn top picking retail traders who have been getting their asses handed to them for months on end celebrating in victory today because they finally got one right. This is the worst thing that could happen to them because it keeps their hopes alive giving their crippled accounts another life line. I'm waiting for the day when all these jokers I'm tracking stop posting or openly admit they are quitting. One by one its happening and I've posted such confessions here.
So, have we in fact started the consolidation phase that I've been calling for? Perhaps but I still think there's going to be a least another stab at 1150 and possibly a bit higher. I really don't care as I've been focusing on my attention on individual microcap/small cap stocks that have minimal day to day correlation with the general markets. I will become interested in an index trade if there's a really good IT setup up and quite frankly there hasn't been one since November 2 and since I've vowed never to intraday trade again I haven't bothered playing the general markets for quite some time. Last year my attempts to trade intraday were a waste of time and effort. I basically broke even doing that which is probably better than what most people do.
Consolidation phase of bull market comming soon
To repeat what I said last week, the initial thrust of a new bull market trends to be relentless for about 1 year (give or take a couple of months) with pullbacks no greater than 10% from any peak. We are now in the window when the initial thrust ends and a multi-month consolidation begins before the next phase of the bull market commences. An Intermediate term top in the 1150-1200 range makes sense given that this is the starting point of when the market took the parabolic pounding in the fall of 2008.
You can see by the long term chart that it was literally a straight line down. I find it hilarious when people say the market is ridiculous at current levels when all we've done is rally back close to the point where we've undone this horrific, once in a generation crash. Did people forget how extreme that crash was? How every single technical indicator went to never been seen before, jaw dropping extremes that even the biggest bears couldn't imagine?
If we go by the new bull market playbook the rally should stop right anywhere between now and early March with 1200ish being the maximum high. At that point, the market should enter a sideways or downward tilting multi-month consolidation phase which I'm sure is going to get everyone thinking that the market is rolling over and the bear is about to resume. Fat chance in my opinion but I'm always keeping an open mind.
If you want to try and take advantage of the consolidation phase that is likely comming by shorting the market go ahead and be my guest...just remember that in early 2004..the topping phase took 3 months and who’s to say that we haven't seen the ultimate high of this initial thrust yet? I think we haven't.
Looking further ahead, according to Zacks, earnings for the SPX are estimated to be in the $74-76 range for 2010 (pretty much the consensus view) and $84-91 in 2011. Did you know that the peak annual earnings recorded in the history of the SPX were about $87 in 2006? That means in 2011 the SPX is poised to have record earnings! Now I know what you're thinking...who's to say Zacks is going to be right with their estimates? That's a good point. But I would say there's a greater chance for them to be too CONSERVATIVE than too optimistic! Why? Because analysts such as those at Zacks are notorious for being behind the curve. When the trend in earnings has turned the corner and is on the rise like now, they tend to underestimate its rate of growth, and when the trend in earnings turns to the downside they tend to underestimate it's rate of decline (2008 was a perfect example). If Zack's $84-91 estimate for 2011 is accurate (which again, will likely end up being too low) where do you think the market will be by then? Not sub 666 like the bears think that's for sure.
You can see by the long term chart that it was literally a straight line down. I find it hilarious when people say the market is ridiculous at current levels when all we've done is rally back close to the point where we've undone this horrific, once in a generation crash. Did people forget how extreme that crash was? How every single technical indicator went to never been seen before, jaw dropping extremes that even the biggest bears couldn't imagine?
If we go by the new bull market playbook the rally should stop right anywhere between now and early March with 1200ish being the maximum high. At that point, the market should enter a sideways or downward tilting multi-month consolidation phase which I'm sure is going to get everyone thinking that the market is rolling over and the bear is about to resume. Fat chance in my opinion but I'm always keeping an open mind.
If you want to try and take advantage of the consolidation phase that is likely comming by shorting the market go ahead and be my guest...just remember that in early 2004..the topping phase took 3 months and who’s to say that we haven't seen the ultimate high of this initial thrust yet? I think we haven't.
Looking further ahead, according to Zacks, earnings for the SPX are estimated to be in the $74-76 range for 2010 (pretty much the consensus view) and $84-91 in 2011. Did you know that the peak annual earnings recorded in the history of the SPX were about $87 in 2006? That means in 2011 the SPX is poised to have record earnings! Now I know what you're thinking...who's to say Zacks is going to be right with their estimates? That's a good point. But I would say there's a greater chance for them to be too CONSERVATIVE than too optimistic! Why? Because analysts such as those at Zacks are notorious for being behind the curve. When the trend in earnings has turned the corner and is on the rise like now, they tend to underestimate its rate of growth, and when the trend in earnings turns to the downside they tend to underestimate it's rate of decline (2008 was a perfect example). If Zack's $84-91 estimate for 2011 is accurate (which again, will likely end up being too low) where do you think the market will be by then? Not sub 666 like the bears think that's for sure.
Tuesday, January 19, 2010
On fire!
I've gotten off to a fantastic start so far this year. In times like this it's easy to fall into the overconfidence trap. I can't help but feel a little euphoric but I've been doing this long enough to know that this is a no no and so I've told myself a few times tonight to "shut the fuck up...you're not as good as you think". I've taken a look at my holdings to see if there is anything that needs to be adjusted tomorrow and I may just take a few off the table with bev.to if it gaps up. I will not depart with my core position in that stock given that it just made a fresh 3 year high, is still fundamentally cheap with great earnings to come down the pipe for at least 3 quarters. Another of my holdings gdc.to has just broken out from a nice base and should go at least to about $3 before running into resistance where I may take a few off the table. Fundamentally that stock should hit at least $4 this year.
An interesting play I've taken a position recently is ggc.to. This is a silver mining company which has a mine in Mexico. It got shut down in 2008 due to an illegal roadblock by ex employees. This combined with the financial meltdown caused the stock to get crushed from about $4 to 0.22. That roadblock was successfully removed in December and with silver prices strong, the stock is very cheap and has catalysts to bounce back sharply. They do need to do a financing to restart and expand the mine and I'm sure they would like the stock price higher to do that. The stock is also attractive for a takeover. The company appointed a new chairman of the board last year who subsequently purchased $50,000 of the stock in the low .30's. Insiders hold about 20%of the total shares which is good. One issue the company has is its debt load - it's rather high but not serious enough to be a going concern threat. I doubt very much they are just going to sit there with this quality mine and do nothing....I suspect there will be significant news coming.
But the most promising thing about this stock and the thing that is always number 1 on my list is how the chart looks like. If the chart is crap I don't care about anything else and the chart here looks good.
The stock looks to be creeping up from a nice base and a breakout looks immanent. With silver prices so strong it's just a matter of time. Remember, this stock was once $4 when silver was $14. It's now about 33% higher. Therefore, it's not too much to ask to see this stock go to $1.50. If you play stocks like this be careful because they are thinly traded and there's a lot of noise volatility which makes the use of stops ineffective. Simply risk what you can afford to lose or scale into positions.
An interesting play I've taken a position recently is ggc.to. This is a silver mining company which has a mine in Mexico. It got shut down in 2008 due to an illegal roadblock by ex employees. This combined with the financial meltdown caused the stock to get crushed from about $4 to 0.22. That roadblock was successfully removed in December and with silver prices strong, the stock is very cheap and has catalysts to bounce back sharply. They do need to do a financing to restart and expand the mine and I'm sure they would like the stock price higher to do that. The stock is also attractive for a takeover. The company appointed a new chairman of the board last year who subsequently purchased $50,000 of the stock in the low .30's. Insiders hold about 20%of the total shares which is good. One issue the company has is its debt load - it's rather high but not serious enough to be a going concern threat. I doubt very much they are just going to sit there with this quality mine and do nothing....I suspect there will be significant news coming.
But the most promising thing about this stock and the thing that is always number 1 on my list is how the chart looks like. If the chart is crap I don't care about anything else and the chart here looks good.
The stock looks to be creeping up from a nice base and a breakout looks immanent. With silver prices so strong it's just a matter of time. Remember, this stock was once $4 when silver was $14. It's now about 33% higher. Therefore, it's not too much to ask to see this stock go to $1.50. If you play stocks like this be careful because they are thinly traded and there's a lot of noise volatility which makes the use of stops ineffective. Simply risk what you can afford to lose or scale into positions.
Do you have structure?
I'm quite a disorganized person. I also procrastinate and manage time poorly which is a perfect recipe for being tardy. These are probably the biggest flaws I have as a person which I know I must and can improve on. These flaws account for at least 80%of the times that my wife gets pissed at me. I'm very instinctive/intuitive and I believe that these flaws could be a side effect of this. But it's not a good excuse. Bad habits are the bigger culprit. I don't know exactly how they started but they did.
At one point these flaws I had infected my portfolio. I had no structure, no game plan. I would trade/invest by the seat of my pants. When I decided to do this full time I knew I had to be more serious and put in place a structure. Everyone should have some sort of rules/guidelines to go by when investing. I personally believe such rules should change when markets change i.e. 1 set of rules in a bull market and another in a bear market. Bull markets and bear markets are 2 different animals...pun intended. In bull markets I learned the best strategy is primarily buy and hold and trade sparingly. Stock picking is important if you want to make the really big gains. In bear markets it's all about market timing the big swings. It's best to stick with trading indices both on the long and short side and don't buy and hold anything except for cash and fixed income.
Getting back to rules...it's important to have them because it keeps you out of trouble. It helps prevent your emotions and ego getting the better of you. Not only that, but it keeps you from being accidently overexposed to one particular position/sector, keeps you on course to following the strategy you have in place and helps prevents hesitation/indecision.
My goal is to achieve 40%+ annual returns and therefore the rules I have in place are designed for such a goal. The following are the rules I have in place pertaining to Money Management during bull market conditions.
Rules for Stocks, ETFs and Deep in the Money Options
• Maximum concentration in any 1 sector = 35%
• Maximum total capital committed = 85% (always keep at least 15% cash on hand)
• Maximum capital committed to any 1 position = 20%
• Minimum holdings when fully invested = 5 positions
• Maximum holdings when fully invested = 12 positions
Rules for OTM/ATM Options
• Buy only in direction of well established trend (no bottom/top picking) except for hedging purposes
• Must have at least 45 days to expiration
• Max capital per non-index play = 3.5%
• Max capital per index play = 5% (10% if used for hedging)
• Total max capital for OTM/ATM plays = 10%
Position Building with Stocks, ETFs and Deep in the Money Options
• Initial position size = 3.5 - 7.5% of capital
• Add additional 3.5 - 7.5% of capital (to max of 20% total) only when showing profit with position
Position Management for Microcap stocks (stocks < $2) and OTM/ATM Options
• Stops usually not used
• Must not take profits until at least 100% gain
• Must take at least 35% profit after 200% gain
• Consider dumping non performing position after 6 months (stocks only)
• Allow non preforming position maximum 12 months to perform before dumping (stocks only)
Position Management for Small/Midcap stocks (stocks between $2-10) and Deep in the Money Options
• May or may not use stops (depending on context)
• Must not take profit until at least 50% gain
• Must take at least 50% profit after 200% gain
• Consider dumping non performing position after 6 months
• Allow non preforming position maximum 12 months to perform before dumping
You will notice that some of these rules are not really rules but rather guidelines. That's because I believe every situation is unique, not suitable for hard and fast rules and it also gives my intuitiveness/instincts "room" to do it's thing. But some things such as the first 5 points are unbreakable rules for me. You will also notice that I don't always require the use of stops. That doesn't mean I won't ever bail on a losing position. I will if appropriate. Also, by not committing the full intended capital on a position on my first trade and only adding to it if it shows a profit, that in a sense is like using a stop, because if my initial entry shows a loss I am not allowed to add to it and so a loss on that starter position even if severe won't be large on a percentage of portfolio basis. By not having a hard stop on your small initial position, it allows the position plenty of opportunity to prove itself reducing whipsaws. As you can see I don't average down only up. I only reward good behavior not bad.
Everyone has their own unique goals, time horizon, risk tolerance, market outlook and opinions therefore everyone should have their own unique set of rules/guidelines for their portfolios. Just make sure you have something.
At one point these flaws I had infected my portfolio. I had no structure, no game plan. I would trade/invest by the seat of my pants. When I decided to do this full time I knew I had to be more serious and put in place a structure. Everyone should have some sort of rules/guidelines to go by when investing. I personally believe such rules should change when markets change i.e. 1 set of rules in a bull market and another in a bear market. Bull markets and bear markets are 2 different animals...pun intended. In bull markets I learned the best strategy is primarily buy and hold and trade sparingly. Stock picking is important if you want to make the really big gains. In bear markets it's all about market timing the big swings. It's best to stick with trading indices both on the long and short side and don't buy and hold anything except for cash and fixed income.
Getting back to rules...it's important to have them because it keeps you out of trouble. It helps prevent your emotions and ego getting the better of you. Not only that, but it keeps you from being accidently overexposed to one particular position/sector, keeps you on course to following the strategy you have in place and helps prevents hesitation/indecision.
My goal is to achieve 40%+ annual returns and therefore the rules I have in place are designed for such a goal. The following are the rules I have in place pertaining to Money Management during bull market conditions.
Rules for Stocks, ETFs and Deep in the Money Options
• Maximum concentration in any 1 sector = 35%
• Maximum total capital committed = 85% (always keep at least 15% cash on hand)
• Maximum capital committed to any 1 position = 20%
• Minimum holdings when fully invested = 5 positions
• Maximum holdings when fully invested = 12 positions
Rules for OTM/ATM Options
• Buy only in direction of well established trend (no bottom/top picking) except for hedging purposes
• Must have at least 45 days to expiration
• Max capital per non-index play = 3.5%
• Max capital per index play = 5% (10% if used for hedging)
• Total max capital for OTM/ATM plays = 10%
Position Building with Stocks, ETFs and Deep in the Money Options
• Initial position size = 3.5 - 7.5% of capital
• Add additional 3.5 - 7.5% of capital (to max of 20% total) only when showing profit with position
Position Management for Microcap stocks (stocks < $2) and OTM/ATM Options
• Stops usually not used
• Must not take profits until at least 100% gain
• Must take at least 35% profit after 200% gain
• Consider dumping non performing position after 6 months (stocks only)
• Allow non preforming position maximum 12 months to perform before dumping (stocks only)
Position Management for Small/Midcap stocks (stocks between $2-10) and Deep in the Money Options
• May or may not use stops (depending on context)
• Must not take profit until at least 50% gain
• Must take at least 50% profit after 200% gain
• Consider dumping non performing position after 6 months
• Allow non preforming position maximum 12 months to perform before dumping
You will notice that some of these rules are not really rules but rather guidelines. That's because I believe every situation is unique, not suitable for hard and fast rules and it also gives my intuitiveness/instincts "room" to do it's thing. But some things such as the first 5 points are unbreakable rules for me. You will also notice that I don't always require the use of stops. That doesn't mean I won't ever bail on a losing position. I will if appropriate. Also, by not committing the full intended capital on a position on my first trade and only adding to it if it shows a profit, that in a sense is like using a stop, because if my initial entry shows a loss I am not allowed to add to it and so a loss on that starter position even if severe won't be large on a percentage of portfolio basis. By not having a hard stop on your small initial position, it allows the position plenty of opportunity to prove itself reducing whipsaws. As you can see I don't average down only up. I only reward good behavior not bad.
Everyone has their own unique goals, time horizon, risk tolerance, market outlook and opinions therefore everyone should have their own unique set of rules/guidelines for their portfolios. Just make sure you have something.
Friday, January 15, 2010
Wanna know when short rates will go up? Watch job numbers and the 2 yr bond
A major topic of conversation in investment land is when the fed is going to start raising rates. Consensus is for them to start doing so in the latter part of the year. However, history shows that the fed doesn't raise rates until there's clear evidence of a recovery in the economy and by clear I mean solid and consistent job creation. Right now there's none of that going on which suggests the consensus will be wrong.
It took 9 solid months of job growth before the fed started hiking rates during the last cycle in 2004. It took them even longer to respond after the 1990 recession. Job growth was strong for pretty much 2 years before they started hiking in February 1994.
Given Bernanke's reputation as an inflationist similar to Greenspan if not more so and the lingering effects of the shell shock due to the crash, I believe the fed is going to act in a similar way this time as well. They will error on the side of being too slow to raise rates in a meaningful way. At best, they may hike to .5-1% to remove the emergency level of interest rates, but until jobs on are the solid path to recovery I doubt they will go higher.
There's another way to speculate as to when rates will rise aside from looking at history. Pay attention to the behavior of the 2 year bond. The 2 year bond yield is very sensitive to the expected fed funds rate in the near future. In 2004 the yield in the 2 yr rallied strongly for 3 months prior to the first rate hike correctly anticipating the first hike in July 2004 and the series of hikes that were to follow.
In 1994 however, bond investors were caught flat footed by the first rate hike which occured in Feburary. But the yield subsequently surged big time and relentlessly after the first hike.
Currently the 2 year bond is saying "no dice" regarding the prospect of any rate hike anytime soon.
Although improving, the job situation is still weak and given the lingering shell shock from the crash, I believe that there will be no rate hikes in 2010. I originally believed there would be a sooner than expected hike but now I'm thinking the opposite. I'll probably change my mind if the 2 year bond yield breaks out. If however, there is a hike to 0.5-1% this year to remove the emergency status without any solid job gains, I expect that rate to remain in place until we see at the very least 9 months of solid job gains.
It took 9 solid months of job growth before the fed started hiking rates during the last cycle in 2004. It took them even longer to respond after the 1990 recession. Job growth was strong for pretty much 2 years before they started hiking in February 1994.
Given Bernanke's reputation as an inflationist similar to Greenspan if not more so and the lingering effects of the shell shock due to the crash, I believe the fed is going to act in a similar way this time as well. They will error on the side of being too slow to raise rates in a meaningful way. At best, they may hike to .5-1% to remove the emergency level of interest rates, but until jobs on are the solid path to recovery I doubt they will go higher.
There's another way to speculate as to when rates will rise aside from looking at history. Pay attention to the behavior of the 2 year bond. The 2 year bond yield is very sensitive to the expected fed funds rate in the near future. In 2004 the yield in the 2 yr rallied strongly for 3 months prior to the first rate hike correctly anticipating the first hike in July 2004 and the series of hikes that were to follow.
In 1994 however, bond investors were caught flat footed by the first rate hike which occured in Feburary. But the yield subsequently surged big time and relentlessly after the first hike.
Currently the 2 year bond is saying "no dice" regarding the prospect of any rate hike anytime soon.
Although improving, the job situation is still weak and given the lingering shell shock from the crash, I believe that there will be no rate hikes in 2010. I originally believed there would be a sooner than expected hike but now I'm thinking the opposite. I'll probably change my mind if the 2 year bond yield breaks out. If however, there is a hike to 0.5-1% this year to remove the emergency status without any solid job gains, I expect that rate to remain in place until we see at the very least 9 months of solid job gains.
Thursday, January 14, 2010
Self Evaluation
I guess I should have done this a little sooner. Although I've been doing this for a while, 2009 was my first year as a full time trader/investor. When I look back at how I did in 2009 I have mixed feelings. I returned 32%. It's a good number compared to most I'm sure and I made these returns while carrying a cash balance of about 50% on average and with Bernie Madoff-like drawdowns (except his numbers were fake while mine real). Therefore, if you took some sort of risk adjusted measure of my performance like the Sharpe ratio I did quite well. But why do I have mixed feelings? I should have done better. I fell short of my 40% goal. Yes it's a lofty goal but it was certaintly doable had I acted more on my convictions. I was a little slow in embracing the turnaround in the market even though I saw the signs a lot sooner than most people. Although I didn't get burned shorting the rally like everyone else in the spring and summer, I was waiting on the sidelines too long given like I said, that I saw signs that the trend had changed from bear to bull. But I can't be too hard on myself because waiting for a clear turnaround after the historic crash we went through wasn't such a bad thing to do. How many people turned bear to bull far too early and got killed in 2008? Tons.
I learned throughout the years that it’s OK to miss the first few months of a new bull or bear market because there's still plenty of time and opportunity to make money with the new trend. The safest and easiest way to make money is when you have the wind at your back and the number one thing that makes people lose money is trying to catch tops and bottoms. I saw so many smart people convert from bear to bull far too early in 2008 and got absolutely crushed losing any money they had made being short and then some. Many people made the same mistake on the upside in 2009 by turning bear too early.
My main criticism about myself in 2009 was that I didn't act upon my beliefs enough. The good thing I did do was being patient enough to wait for the good opportunities even although I missed some and I often didn't put enough on the line when I did make a move. A mistake I would often make in the past would be this: I would miss a great opportunity or only bet small kicking myself for not being bolder. As a result I become bold but at the expense of patience, chasing subpar opportunities often losing money which made me feel even worse about myself. This caused me to be gun-shy which resulted in missing out on good opportunities yet again - a vicious cycle. That didn't happen at all this year. Sure, I missed some good opportunities but I didn't go "on tilt" afterwards as described above.
Another criticism I have about myself relating to missed opportunities was that I was too picky with entry points often waiting for everything to be "perfect" before making a move. This again, caused me to miss out on some opportunities. I have corrected this bad habit by taking at least a small "starter" position when I see something I like but I'm a little unsure about the timing.
A good thing I did as well last year was cutting any losing trades short. My biggest loss on a single trade was 2.5% of my account. A bad thing I did was cutting winners too short simply because I showed a good profit immediately. However, I did a lot better at letting winners ride as the year progressed and I really began to get in the zone come September as I rode a couple of big winners.
If I had to grade myself for my overall performance I would give myself a B.
Given a renewed sense of confidence I have in myself I need to be careful in not getting a swell head being reckless with my trades/investments just because I'm showing a profit. Don't treat your profits as the house's money. My goal is focus on longer terms moves because I've realized that this is my strength. This is going to be a big test because I'm one of those guys that checks his portfolio intraday several times (when you do this full time I suppose it's hard not to) and that may cause one to make hasty decisions by bailing or taking profits too soon which I've been guilty of doing.
I hope everyone else had a successful 2009 and if not I hope you learned from your mistakes.
I learned throughout the years that it’s OK to miss the first few months of a new bull or bear market because there's still plenty of time and opportunity to make money with the new trend. The safest and easiest way to make money is when you have the wind at your back and the number one thing that makes people lose money is trying to catch tops and bottoms. I saw so many smart people convert from bear to bull far too early in 2008 and got absolutely crushed losing any money they had made being short and then some. Many people made the same mistake on the upside in 2009 by turning bear too early.
My main criticism about myself in 2009 was that I didn't act upon my beliefs enough. The good thing I did do was being patient enough to wait for the good opportunities even although I missed some and I often didn't put enough on the line when I did make a move. A mistake I would often make in the past would be this: I would miss a great opportunity or only bet small kicking myself for not being bolder. As a result I become bold but at the expense of patience, chasing subpar opportunities often losing money which made me feel even worse about myself. This caused me to be gun-shy which resulted in missing out on good opportunities yet again - a vicious cycle. That didn't happen at all this year. Sure, I missed some good opportunities but I didn't go "on tilt" afterwards as described above.
Another criticism I have about myself relating to missed opportunities was that I was too picky with entry points often waiting for everything to be "perfect" before making a move. This again, caused me to miss out on some opportunities. I have corrected this bad habit by taking at least a small "starter" position when I see something I like but I'm a little unsure about the timing.
A good thing I did as well last year was cutting any losing trades short. My biggest loss on a single trade was 2.5% of my account. A bad thing I did was cutting winners too short simply because I showed a good profit immediately. However, I did a lot better at letting winners ride as the year progressed and I really began to get in the zone come September as I rode a couple of big winners.
If I had to grade myself for my overall performance I would give myself a B.
Given a renewed sense of confidence I have in myself I need to be careful in not getting a swell head being reckless with my trades/investments just because I'm showing a profit. Don't treat your profits as the house's money. My goal is focus on longer terms moves because I've realized that this is my strength. This is going to be a big test because I'm one of those guys that checks his portfolio intraday several times (when you do this full time I suppose it's hard not to) and that may cause one to make hasty decisions by bailing or taking profits too soon which I've been guilty of doing.
I hope everyone else had a successful 2009 and if not I hope you learned from your mistakes.
Wednesday, January 13, 2010
Do you still doubt this is a bull market?
Throughout the spring and summer last year how many times did you hear the gurus on TV call for a 10-15% pullback or more? I remember PLENTY of times and noted it here. I also said that if we did see a 10%+ pullback better watch out because it would likely have indicated that the rally was in fact a bear market rally and such a convenient pullback would likely be the start of further weakness. I mentioned back then that if the rally that began in March was a new bull market pullbacks would be limited to less than 10% because that's how the initial thrust of a new bull market behaves....it's fast, relentless and doesn't give you those convenient entry points.
Furthermore, the initial thrust of new bull markets tends to last for about 12 months before going through a multi-month consolidation. I would say that the rally from March has pretty much passed the bull market test. We are 2 months away from the 12 month mark.
Let's take a look at how 1982, 1991, and 2003 initial bull market rallies looked like from the start and 2 years afterwards and compare it to the current rally
1982 Initial Bull Run
Furthermore, the initial thrust of new bull markets tends to last for about 12 months before going through a multi-month consolidation. I would say that the rally from March has pretty much passed the bull market test. We are 2 months away from the 12 month mark.
Let's take a look at how 1982, 1991, and 2003 initial bull market rallies looked like from the start and 2 years afterwards and compare it to the current rally
1982 Initial Bull Run
1991 Initial Bull Run
2003 Initial Bull Run
2009 Initial Bull Run
So, you can see that in each of these new bull markets above, the market basically went straight up for about 1 year with no 10%+ pullbacks from any peak. Then afterwards, there was a multi-month sideways or downward tilting consolidation period. The 2003 initial Bull Run looks a lot like the 2009 rally doesn't it? It's almost a carbon copy! Always be careful comparing the current market to some other previous period because seldom do things repeat exactly the same way but like these historical charts show, you do tend to see similarities in the behavior of bull markets during the initial thrust.
In my "the follies of sentiment" post I made note that during the initial bull market thrust, extreme bullish sentiment from Investor's Intelligence surveys tends to happen but the market simply ignores it and powers through it anyways (aside from minor dips). The multi-month consolidation phase that follows ends up cooling off this bullish sentiment. Take a look at these long term charts and you will see what I mean (you probably have to click them to get a better view).
I see a lot of sentiment gurus and the perma bear retail bag holders warn about this bullish sentiment comparing it to levels that were seen in 2007 which foretells doom for the market. This is a mistake in my opinion. People need to do their homework.
Look at the big spikes in bullishness in 1982, 1991, 2003. All that resulted was a consolidation period before much higher highs were realized. The spike in bullish sentiment is simply an unwinding of the massive and chronic pessimism that preceded it. With TV commericals still making mention of the reccession and "hard times" do you honestly think people are extremely bullish? Give me a break. The same goes with the typical retail investor which I think I've done a good job in proving how skeptical/bearish they still are.
So, in conclusion be on the lookout for this initial bull market thrust to end in March. It's possible, like in 2003 to see the rally actually end sometime this month and then get retested once or twice with the last test being in March. Either way, we probably won't see any meaningful downside until at least March if we go by the "new bull market playbook". But let's not be careful in being dogmatic about this. There's no rule that says things must unfold this way...but by the looks of things, it seems like it will.
And another thing, if you have any decency in you make a donation to aid in this Haiti disaster. If you don't you're an asshole. Sorry, but it's true.
Monday, January 11, 2010
It's deja vu all over again!
I'm sure you have heard about the net outflows from mom and pop investor in 2009 and how this is supposed to be a bad thing because it shows a lack of confidence by investors...I've argued the opposite...that this behavior by mom and pop investor is actually bullish. History shows when they fade the market like this it sends a strong contrarian signal re-enforcing the trend in place. Why? Because they are the dumb money. They often make decisions using rear view mirror statistics and emotions.
Check out this expert from an article I read
There was no gain at all, absolutely zilch, from net new sales. And this was during a year when all the North American stock markets posted gains in excess of 20%. If no one is buying your product under those conditions, you've got trouble.
The bear market caused a lot of people to rethink their entire investment approach and mutual funds suffered as a result. When interest rates start to move back up, which they will eventually, we could see a lot of money flowing from mutual funds into GICs unless the industry begins to seriously address its problems.
This article was written about 6 days ago...did I say days? Sorry...I meant years! But if I did say 6 days ago it would have been true as well wouldn't it?
And guess what? Eventually the retail investor DID return and as usuall, did so only after it was painfully obvious the economy had truly turned around and the bear market of 2000-2002 was really over....just in time for the next bear market! Poor suckers.
Given that they've been burned big time twice now in such a short period of time, it's probably going to take even longer for moms and pops to feel confident again about stocks especially when the economy is still not creating jobs yet. Don't buy into the "retiring baby boomers don't want stocks anymore" argument as an explanation as to why they've been shying away. When you retire you still have another 20+ years of living to do which gives you the time frame you need to have equities as part of your portfolio especially when the alternative GICs and bonds offer terrible competition. No...the main reason people have been selling into the rally is fear and disgust....but eventually greed will get them...it always has. It could take 1,2,3 or more years but it WILL happen mark my words.
As far as the market goes....I gotta tell you, it's amazing how the higher it goes the angrier and bolder the losers and bag holders get. You would figure that after taking such a beating the losers would show some humility...but no...it's just the opposite! Just look at the Yahoo boards....what a joke!
I noticed Alcoa reported and is down after hours. All this is likely to do is keep the hopes of these jokers alive and the prevent the TRUE bear capitulation that I believe the market needs before any correction of significance can occur but one by one they are giving up. Check out this post I just read
Yes I've lost money shorting this market
but I swear I will never touch this market again.
I don't beleive this is a free market.
I don't beleive the numbers the telling us.
I don't beleive any of the volume telling us there is real buying but this thing still going up every day.
I am done with this game forever.
The hell with the money I lost. It hurt me to know I am right but still be wrong.
GL to all of you.
Check out this expert from an article I read
There was no gain at all, absolutely zilch, from net new sales. And this was during a year when all the North American stock markets posted gains in excess of 20%. If no one is buying your product under those conditions, you've got trouble.
The bear market caused a lot of people to rethink their entire investment approach and mutual funds suffered as a result. When interest rates start to move back up, which they will eventually, we could see a lot of money flowing from mutual funds into GICs unless the industry begins to seriously address its problems.
This article was written about 6 days ago...did I say days? Sorry...I meant years! But if I did say 6 days ago it would have been true as well wouldn't it?
And guess what? Eventually the retail investor DID return and as usuall, did so only after it was painfully obvious the economy had truly turned around and the bear market of 2000-2002 was really over....just in time for the next bear market! Poor suckers.
Given that they've been burned big time twice now in such a short period of time, it's probably going to take even longer for moms and pops to feel confident again about stocks especially when the economy is still not creating jobs yet. Don't buy into the "retiring baby boomers don't want stocks anymore" argument as an explanation as to why they've been shying away. When you retire you still have another 20+ years of living to do which gives you the time frame you need to have equities as part of your portfolio especially when the alternative GICs and bonds offer terrible competition. No...the main reason people have been selling into the rally is fear and disgust....but eventually greed will get them...it always has. It could take 1,2,3 or more years but it WILL happen mark my words.
As far as the market goes....I gotta tell you, it's amazing how the higher it goes the angrier and bolder the losers and bag holders get. You would figure that after taking such a beating the losers would show some humility...but no...it's just the opposite! Just look at the Yahoo boards....what a joke!
I noticed Alcoa reported and is down after hours. All this is likely to do is keep the hopes of these jokers alive and the prevent the TRUE bear capitulation that I believe the market needs before any correction of significance can occur but one by one they are giving up. Check out this post I just read
Yes I've lost money shorting this market
but I swear I will never touch this market again.
I don't beleive this is a free market.
I don't beleive the numbers the telling us.
I don't beleive any of the volume telling us there is real buying but this thing still going up every day.
I am done with this game forever.
The hell with the money I lost. It hurt me to know I am right but still be wrong.
GL to all of you.
Saturday, January 9, 2010
Chinese water torture continues for bears
How agonizing must it be for anyone who's been short the market. It's just been an agonizing grind higher. Even for those who were just short for a quick trade has been ran over. I'm sure these bears were saying "finally some relief!" when non-farm payrolls came in a disappointing -85K but no dice! This negative number is will keep the fed on hold until at least April and squash the growing chorus of an earlier than expected fed rate hike (for now).
Earning seasons approaches and from what I've been reading, it's poised to be good one yet again. The Bear's only hope now is for some sort of a “sell on the news" reaction. I've been saying this for months...anyone who has been short the market longer term is running uphill against the wind. We are in a situation quite the opposite of 2008 whereby the earnings were deteriorating, constantly below expectations while financial stress in the form of credit spreads, CDS spreads and the like were rising. It's these sorts of conditions when you want to be short. Sure, you could say that at the start of bear markets these types of fundamentals look their best but until they turn in the opposite direction you are just guessing as to when that turn will happen and more often than not you will get run over. Trends tend to feed on themselves and last longer than you think possible and besides, we aren't even at extremes yet with respect to how good things can get and we still unwinding from historical once in a generation negative extremes.
I like to visit the message boards on Yahoo to see what the typical "yahoo" investor is thinking....pun intended. I continue to notice strong disbelief of the sustainability of this rally. You would figure that as the market makes new 52 week highs there would be people posting messages bragging about how much money they have been making. Instead, I continue to see angry posters complaining about the market for the most part and the occasional confession about how much money the person has LOST! I realize this is contrary to what you see in some of the sentiment surveys but it clear to me there's still quite a large hoard of investors out there still bitter, skeptical and bearish and that's great news for long term bulls.
Check out this post I read which is a popular view amongst the retail ilk
Retail investors ARE NOT IN THIS MARKET 9-Jan-10 02:16 pm
Because it went up to fast - And against all fundamental economic facts. We kept hearing, "Market is pricing in recovery" - While mega companies were going bankrupt, and big regional banks were being shut down (and still are), while Gold was ramping to new highs, and housing was falling through the floor, and jobs were dropping at 500 thousand per month. Most of these facts are still the case.
The market was not pricing in anything, it was "being made" to price in recovery. RETAIL investors never had a chance to get in - as they usually don't. No one believes how we got here to begin with, and no one in their right mind would risk a dime betting it goes higher from here. The risk vs. reward would stress a battle tested trader/investor...Never mind Mom & Pop's conservative 401k that got out a 70% loser back in April.
When Govt and the banks realize they threw a stock market party and nobody came, and this has become a futile exercise of Goldman's quants swapping spit with the machines at Treasury - The party will most certainly come to a disasterous and humiliating halt.
So long as I continue to see plenty of posts like this from the rookies and wannabes it makes me comfortable being bullish longer term. For anyone who is still idiotically convinced that the market has been going up only due to the so called PPT or GS take a look at these charts.
Can the "PPT" control credit spreads, retail sales and unemployment claims? And what about the stock markets all over the world which have rallied? Do you honestly believe they are responsible for that as well? Such a load of bullshit and a symptom of denial by the bag holders who refuse to admit how badly wrong they have been.
The SPX and NASDAQ have made fresh 52 week highs. I've said before that a new 52 week high tends to result in yet another 52 week high. I know things are stretched here and the market has a "running on fumes" feel to it but this is what you see during the first thrust of a new bull run and pain is often what you feel when you pick tops or bottoms. Eventually there's going to be an abrupt pullback that will give back a lot of the gains that were made in the weeks prior...eventually. But when? Contrary to what you may expect, I believe such thing will happen after a positive catalyst - something that gives enough bag holding shorts reason to throw in the towel and force underinvested bulls to chase. At that point you get an emotional buying climax.....similar to selling climaxes and then you can see a "sell on the news" reaction. For instance, if we would have seen a strong jobs number on Friday, that may have done the trick for enough bear bag holders to say "Ok now I'm fucked. I better get out of the way before I get killed even more". Instead we got a negative number which kept the hopes alive for the bear bag holders and their lack of capitulation gives support to the market. But one by one as the market grinds higher they give up. I think if we see a bellwether company or 2 reports a strong quarter enough of them will give up to allow for the market to go down in a meaningful way. But that's likely going to happen somewhere in the 1160-1170 range I suspect. It's just a guess on my part. I for one am not playing this game of chicken and continue to focus on individual stocks which have done really well for me. My number one stock has been Bennett Environmental. It's made a huge move and I’m sitting on big gains but I still believe it will go a lot higher given the big earnings that it has in store for 2010 which should be $.80-1 per share.
Earning seasons approaches and from what I've been reading, it's poised to be good one yet again. The Bear's only hope now is for some sort of a “sell on the news" reaction. I've been saying this for months...anyone who has been short the market longer term is running uphill against the wind. We are in a situation quite the opposite of 2008 whereby the earnings were deteriorating, constantly below expectations while financial stress in the form of credit spreads, CDS spreads and the like were rising. It's these sorts of conditions when you want to be short. Sure, you could say that at the start of bear markets these types of fundamentals look their best but until they turn in the opposite direction you are just guessing as to when that turn will happen and more often than not you will get run over. Trends tend to feed on themselves and last longer than you think possible and besides, we aren't even at extremes yet with respect to how good things can get and we still unwinding from historical once in a generation negative extremes.
I like to visit the message boards on Yahoo to see what the typical "yahoo" investor is thinking....pun intended. I continue to notice strong disbelief of the sustainability of this rally. You would figure that as the market makes new 52 week highs there would be people posting messages bragging about how much money they have been making. Instead, I continue to see angry posters complaining about the market for the most part and the occasional confession about how much money the person has LOST! I realize this is contrary to what you see in some of the sentiment surveys but it clear to me there's still quite a large hoard of investors out there still bitter, skeptical and bearish and that's great news for long term bulls.
Check out this post I read which is a popular view amongst the retail ilk
Retail investors ARE NOT IN THIS MARKET 9-Jan-10 02:16 pm
Because it went up to fast - And against all fundamental economic facts. We kept hearing, "Market is pricing in recovery" - While mega companies were going bankrupt, and big regional banks were being shut down (and still are), while Gold was ramping to new highs, and housing was falling through the floor, and jobs were dropping at 500 thousand per month. Most of these facts are still the case.
The market was not pricing in anything, it was "being made" to price in recovery. RETAIL investors never had a chance to get in - as they usually don't. No one believes how we got here to begin with, and no one in their right mind would risk a dime betting it goes higher from here. The risk vs. reward would stress a battle tested trader/investor...Never mind Mom & Pop's conservative 401k that got out a 70% loser back in April.
When Govt and the banks realize they threw a stock market party and nobody came, and this has become a futile exercise of Goldman's quants swapping spit with the machines at Treasury - The party will most certainly come to a disasterous and humiliating halt.
So long as I continue to see plenty of posts like this from the rookies and wannabes it makes me comfortable being bullish longer term. For anyone who is still idiotically convinced that the market has been going up only due to the so called PPT or GS take a look at these charts.
Can the "PPT" control credit spreads, retail sales and unemployment claims? And what about the stock markets all over the world which have rallied? Do you honestly believe they are responsible for that as well? Such a load of bullshit and a symptom of denial by the bag holders who refuse to admit how badly wrong they have been.
The SPX and NASDAQ have made fresh 52 week highs. I've said before that a new 52 week high tends to result in yet another 52 week high. I know things are stretched here and the market has a "running on fumes" feel to it but this is what you see during the first thrust of a new bull run and pain is often what you feel when you pick tops or bottoms. Eventually there's going to be an abrupt pullback that will give back a lot of the gains that were made in the weeks prior...eventually. But when? Contrary to what you may expect, I believe such thing will happen after a positive catalyst - something that gives enough bag holding shorts reason to throw in the towel and force underinvested bulls to chase. At that point you get an emotional buying climax.....similar to selling climaxes and then you can see a "sell on the news" reaction. For instance, if we would have seen a strong jobs number on Friday, that may have done the trick for enough bear bag holders to say "Ok now I'm fucked. I better get out of the way before I get killed even more". Instead we got a negative number which kept the hopes alive for the bear bag holders and their lack of capitulation gives support to the market. But one by one as the market grinds higher they give up. I think if we see a bellwether company or 2 reports a strong quarter enough of them will give up to allow for the market to go down in a meaningful way. But that's likely going to happen somewhere in the 1160-1170 range I suspect. It's just a guess on my part. I for one am not playing this game of chicken and continue to focus on individual stocks which have done really well for me. My number one stock has been Bennett Environmental. It's made a huge move and I’m sitting on big gains but I still believe it will go a lot higher given the big earnings that it has in store for 2010 which should be $.80-1 per share.
Thursday, January 7, 2010
The follies of sentiment
A lot of people want to consider themselves contrarian and so as a contrarian you need to analyze market sentiment and look for extremes. Most of wannabe contrarians will blindly go bullish when they see bearish extremes and blindly go bearish when they see bearish extremes. This can result in a lot of pain because the paramaters of what is considered "extreme" are different when comparing bull markets to bear markets. Most traders/investors fail to make that adjustment and it’s the transition from bear to bull or bull to bear which wipes out or cripples accounts.
2008 was a year most so called "contrarians" got absolutely crushed and I'm sure September 2008 was when most of the damage happened. I remember that month well because I remember a lot of people came out saying that pessimism was at such an extreme and that you had to be a buyer. The panic we saw in September 2008 was similar to that seen at the July 2002 bear market bottom and so many people got fooled into thinking that the worst would soon be over. Here's a video from Charles Binderman, CEO of trimtabs in September 2008 which shows you what I mean.
During this historic rally that began in March, we've seen the same "gurus" who got burned being bullish too early in 2008 getting burned once again in 2009 being too bearish. Here's a clip on Charles Binderman on August 28 2009.
Not to pick on Binderman, but he was bullish when the SPX was at around 1200 in Sept 08 on its way down to 666 getting badly burned and was bearish when SPX was around 1035 a year later and got embarrassed again. This happened to MANY people and I think it explains the hostility towards this rally and it's why the motto of this blog will always be true.
So now what? Well, I've been either short term cautious or neutral more or less since around mid November and the market has still managed to grind higher. Not a surprise really given that as I've mentioned ad nauseum how ST bearish signals in bull markets can be ignored for quite a while as they simply get to even greater extremes.
Many traders got burned playing the contrarian in 2003 as they did in 2009. What happened? Why didn't it work? It's because it is not uncommon to see an extreme surge in bullish sentiment from traditional indicators such as II and AAII during the initial thrusts of new bull markets. It happened after the 1974 and 1982 bottoms and more recently the 2003 bottom. This "pent up bullishness" is the result of the unwinding of chronic bearish sentiment of the bear before it. Keep in mind were we are coming from folks. A year ago everyone was bracing for a 1930's style depression.
The initial thrust of the bull market that began in March of 2003 had a final push higher starting around September of that year. Just before this push sentiment indicators such as Investor's Intelligence and American Association of Individual Investors (AAII) were already at extreme levels of bullishness but the market STILL made that one last charge higher before cooling off in January 2004, transitioning into a multi-month consolidation phase. A lot of bears who were already badly wounded got taken out completely by that move as they clinged on to hopes that sentiment was "too bullish".
At present, II sentiment (which measures newsletter sentiment) has been "too bullish" since early August with a 2:1 ratio of bulls vs. bears or more ever since. Fading this has been disastrous. AAII sentiment (which measures small investor sentiment) on the other hand has been showing stubborn bearishness ever since March and only in the last week did we see a ratio of 2:1 bulls vs. bears (its back down to 1.58 this week).
Below is a graph showing the current allocation of stocks and cash by AAII members. I like this graph because it shows what people are actually doing rather than saying.
At first blush it appears as though there is too much complacency right now given the low allocation to cash and surge in the allocation to stocks and bears would say that this signals the end of the rally. Well, take a look at what happened in late 2003 to early 2004. The market was close to completing the final push of an initial bull market rally that began in 2003 which was then followed by a multi-month consolidation phase. That consolidation phase worried investors and gave hope to bears. It looked like the market had topped out and you can see how investors started raising cash again by mid 2004. But the bull market resumed and eventually made new highs by year end. I think something similar could play out this year. Perhaps we are in that "final push" stage before a multi-month consolidation.
Before this month is over or perhaps as long as early February, I believe we will see the market end its initial bull market thrust that began in March and we will enter into a multi-month consolidation phase similar to what happened in first half of 2004.
As a result of what I think will transpire I believe it's best to be selective and focus on individual names. If you can find stocks that have been dancing to their own tune (i.e. low correlation to the market) with a good chart poised to break out then go ahead and fire away because so long as general economic conditions are not hazardous if the stock has a “good story” it will be in the proper environment to play out. If your stocks are highly correlated to the market then you may want to keep a tight leash if you are fully invested and be willing to lighten up or use a covered call strategy to get some protection. As I’ve mentioned before, correlations of individual stocks relative to the market has been dropping. This makes it more of a stock pickers market now.
But the bottom line is that although we may be close to seeing the end of the first phase of the bull market, I believe higher prices ultimately lie in store. Despite so called high bullishness from things like sentiment survey’s and such how many people do you know are really bullish about the market deep down? Even those who have been bullish have been only cautiously bullish, quaking in their boots anytime the market had a pullback or quick to cut and run at the first hint of trouble. People, bulls and bears alike, are looking over their shoulder for signs of the big bad bear of 2008 to return and because of that, the LT sentiment backdrop is still in good shape even though ST sentiment foundations are shaky.
2008 was a year most so called "contrarians" got absolutely crushed and I'm sure September 2008 was when most of the damage happened. I remember that month well because I remember a lot of people came out saying that pessimism was at such an extreme and that you had to be a buyer. The panic we saw in September 2008 was similar to that seen at the July 2002 bear market bottom and so many people got fooled into thinking that the worst would soon be over. Here's a video from Charles Binderman, CEO of trimtabs in September 2008 which shows you what I mean.
During this historic rally that began in March, we've seen the same "gurus" who got burned being bullish too early in 2008 getting burned once again in 2009 being too bearish. Here's a clip on Charles Binderman on August 28 2009.
Not to pick on Binderman, but he was bullish when the SPX was at around 1200 in Sept 08 on its way down to 666 getting badly burned and was bearish when SPX was around 1035 a year later and got embarrassed again. This happened to MANY people and I think it explains the hostility towards this rally and it's why the motto of this blog will always be true.
So now what? Well, I've been either short term cautious or neutral more or less since around mid November and the market has still managed to grind higher. Not a surprise really given that as I've mentioned ad nauseum how ST bearish signals in bull markets can be ignored for quite a while as they simply get to even greater extremes.
Many traders got burned playing the contrarian in 2003 as they did in 2009. What happened? Why didn't it work? It's because it is not uncommon to see an extreme surge in bullish sentiment from traditional indicators such as II and AAII during the initial thrusts of new bull markets. It happened after the 1974 and 1982 bottoms and more recently the 2003 bottom. This "pent up bullishness" is the result of the unwinding of chronic bearish sentiment of the bear before it. Keep in mind were we are coming from folks. A year ago everyone was bracing for a 1930's style depression.
The initial thrust of the bull market that began in March of 2003 had a final push higher starting around September of that year. Just before this push sentiment indicators such as Investor's Intelligence and American Association of Individual Investors (AAII) were already at extreme levels of bullishness but the market STILL made that one last charge higher before cooling off in January 2004, transitioning into a multi-month consolidation phase. A lot of bears who were already badly wounded got taken out completely by that move as they clinged on to hopes that sentiment was "too bullish".
At present, II sentiment (which measures newsletter sentiment) has been "too bullish" since early August with a 2:1 ratio of bulls vs. bears or more ever since. Fading this has been disastrous. AAII sentiment (which measures small investor sentiment) on the other hand has been showing stubborn bearishness ever since March and only in the last week did we see a ratio of 2:1 bulls vs. bears (its back down to 1.58 this week).
Below is a graph showing the current allocation of stocks and cash by AAII members. I like this graph because it shows what people are actually doing rather than saying.
At first blush it appears as though there is too much complacency right now given the low allocation to cash and surge in the allocation to stocks and bears would say that this signals the end of the rally. Well, take a look at what happened in late 2003 to early 2004. The market was close to completing the final push of an initial bull market rally that began in 2003 which was then followed by a multi-month consolidation phase. That consolidation phase worried investors and gave hope to bears. It looked like the market had topped out and you can see how investors started raising cash again by mid 2004. But the bull market resumed and eventually made new highs by year end. I think something similar could play out this year. Perhaps we are in that "final push" stage before a multi-month consolidation.
Before this month is over or perhaps as long as early February, I believe we will see the market end its initial bull market thrust that began in March and we will enter into a multi-month consolidation phase similar to what happened in first half of 2004.
As a result of what I think will transpire I believe it's best to be selective and focus on individual names. If you can find stocks that have been dancing to their own tune (i.e. low correlation to the market) with a good chart poised to break out then go ahead and fire away because so long as general economic conditions are not hazardous if the stock has a “good story” it will be in the proper environment to play out. If your stocks are highly correlated to the market then you may want to keep a tight leash if you are fully invested and be willing to lighten up or use a covered call strategy to get some protection. As I’ve mentioned before, correlations of individual stocks relative to the market has been dropping. This makes it more of a stock pickers market now.
But the bottom line is that although we may be close to seeing the end of the first phase of the bull market, I believe higher prices ultimately lie in store. Despite so called high bullishness from things like sentiment survey’s and such how many people do you know are really bullish about the market deep down? Even those who have been bullish have been only cautiously bullish, quaking in their boots anytime the market had a pullback or quick to cut and run at the first hint of trouble. People, bulls and bears alike, are looking over their shoulder for signs of the big bad bear of 2008 to return and because of that, the LT sentiment backdrop is still in good shape even though ST sentiment foundations are shaky.
Monday, January 4, 2010
New year resolutions
This is completely non-market related but I wanted to share my thoughts on this topic.
This is the time of the year where we make resolutions to improve ourselves. Most of the time we end up failing to follow through and make the same resolution the next year. So why is it do we fail at improving ourselves all the time?
For example, most smokers have a hard time quitting. Year after year they try but fail and the ones who quit go through a few unsuccessful attempts first. Why is it that they fail? Is it lack of willpower? Perhaps. Lack of discipline? Perhaps. But the biggest factor is a lack of fear of the immediate consequences that result if they fail. They know smoking causes cancer but that's a long term consequence. What happens when we don't follow through with a resolution? Nothing....at least immediately....we remain at status quo. "Ahh...I'll try again next year" is the typical response of a failed resolution. Humans tend to focus too much on the short term and not enough on the long term.
Let's go back to the smoker again. If that smoker had a gun pointed to his head and to the heads of his children at all times which would get fired if he took just one puff of a cigarette, you can guaran-damn-tee 100% he will quit cold turkey instantly no matter how much he smokes a day or for how long he's been a smoker.
Motivation....it's all about proper motivation. We are not motivated enough to achieve our goals to improve because if we don't there are usually little/no immediate consequences. But what if guaranteed immediate death would be the consequence if we failed to achieve any goal we set for ourselves? I know this sounds creepy, silly and extreme but think about it....nothing could motivate you more....you would probably achieve every goal you set out for yourself!
Aside from the "gun to the head" method, the best way to achieve success is to focus on the LONG TERM consequences of failing to achieve the goal and act as if these consequences would be IMMEDIATE if we fail to achieve our goal by the deadline we set. We need to feel some sort of desperation....as if our backs are up against the wall. I know it's cliché but it's all in your mindset. Think about sports. When a team is down by a goal with 5 minutes left in the game that's when they tend to play their best. Think about this big push for climate change...only in recent years has the world began to seriously acknowledge that major steps in reducing greenhouse gases need to be taken because if we don't do so IMMEDIATELY, it could be too late to avoid serious consequences for future generations. Why didn't anyone really care 20 years ago? Lack of motivation. We all knew the long term consequences of manmade greenhouse gases but it wasn't an immediate threat at the time.
It's always the same...we as humans tend to act swiftly for change only when we are forced to and sometimes by then it's too late. If we could learn to focus on the long term consequences of our actions or inactions and take swift, desperate action now, we would be much more successful in achieving our goals and avoiding future problems. I for one am guilty for doing things at the last second which makes me end up being late and disorganized which drives my wife crazy. My new year's resolution is to stop this bad habit...anyone care to point a loaded gun to my head for a year?
This is the time of the year where we make resolutions to improve ourselves. Most of the time we end up failing to follow through and make the same resolution the next year. So why is it do we fail at improving ourselves all the time?
For example, most smokers have a hard time quitting. Year after year they try but fail and the ones who quit go through a few unsuccessful attempts first. Why is it that they fail? Is it lack of willpower? Perhaps. Lack of discipline? Perhaps. But the biggest factor is a lack of fear of the immediate consequences that result if they fail. They know smoking causes cancer but that's a long term consequence. What happens when we don't follow through with a resolution? Nothing....at least immediately....we remain at status quo. "Ahh...I'll try again next year" is the typical response of a failed resolution. Humans tend to focus too much on the short term and not enough on the long term.
Let's go back to the smoker again. If that smoker had a gun pointed to his head and to the heads of his children at all times which would get fired if he took just one puff of a cigarette, you can guaran-damn-tee 100% he will quit cold turkey instantly no matter how much he smokes a day or for how long he's been a smoker.
Motivation....it's all about proper motivation. We are not motivated enough to achieve our goals to improve because if we don't there are usually little/no immediate consequences. But what if guaranteed immediate death would be the consequence if we failed to achieve any goal we set for ourselves? I know this sounds creepy, silly and extreme but think about it....nothing could motivate you more....you would probably achieve every goal you set out for yourself!
Aside from the "gun to the head" method, the best way to achieve success is to focus on the LONG TERM consequences of failing to achieve the goal and act as if these consequences would be IMMEDIATE if we fail to achieve our goal by the deadline we set. We need to feel some sort of desperation....as if our backs are up against the wall. I know it's cliché but it's all in your mindset. Think about sports. When a team is down by a goal with 5 minutes left in the game that's when they tend to play their best. Think about this big push for climate change...only in recent years has the world began to seriously acknowledge that major steps in reducing greenhouse gases need to be taken because if we don't do so IMMEDIATELY, it could be too late to avoid serious consequences for future generations. Why didn't anyone really care 20 years ago? Lack of motivation. We all knew the long term consequences of manmade greenhouse gases but it wasn't an immediate threat at the time.
It's always the same...we as humans tend to act swiftly for change only when we are forced to and sometimes by then it's too late. If we could learn to focus on the long term consequences of our actions or inactions and take swift, desperate action now, we would be much more successful in achieving our goals and avoiding future problems. I for one am guilty for doing things at the last second which makes me end up being late and disorganized which drives my wife crazy. My new year's resolution is to stop this bad habit...anyone care to point a loaded gun to my head for a year?
correction regarding last post
I was in error when I said that every year ending in 0 was negative since 1910. 1950 and 1980 were in fact very good years and 1970 was flat (depending on which index you use). You see....never listen to a word I say!
Sunday, January 3, 2010
2010 prediction: another good year
Towards the end of the year you can get a good handle on Wall Street's expectations for the year to come as analysts and strategists trot out their forecasts. According to data compiled by Birinyi and Associates, the average price target for the SPX in 2010 of 9 major firms on Wall Street is 1222 which represents a moderate gain of 9.5% from current levels. If 2009 represented the first year of a new cyclical bull market (which I believe) then this target may be too low because the second year has typically shown a stronger follow through.
They say history doesn't repeat but it often rhymes.....
In 2003 the market started off poorly but made a bear market bottom in March....the same thing happened in 2009.
2003 showed a 26% gain in the SPX with it ending the year at 1111. In 2009 the SPX showed a 23% gain ending the year at 1115.
By the end of 2003 the fed funds rate was 1% and the 10 year bond yield was 4.26%.
At the end of 2009 the fed funds rate was 0% and the 10 year bond yield was 3.84%.
(the funny thing is that by the end of 2004 the fed funds rate rose to 2.25% and the 10 year bond was about 4.16% which was essentially the same level as it was at the beginning of the year! I remember how this baffled the hell out of everyone....will the same thing happen this year if ST rates go up?...I think yes!).
The 12 month forward EPS estimate for the SPX at the end of 2003 was about $65 giving the market a forward P/E of 17 (and the market still went up another 40% over the next 3.5 years).
The 12 month forward EPS estimate for the SPX at the end of 2009 was $77 giving the market a forward P/E of only 14.
Fears of a double dip recession was evident during the recovery 6 years ago and again now (I would say even more so this time around).
What are the differences between 2003 and 2009? The main one would have to be the economy. The economy had turned the corner more so in 2003 vs. 2009. In 2003 GDP growth was mildly positive in Q1 and firmly positive the rest of that year. Jobs were being added in a significant and consistent manner starting in the summer that year. In 2009 we saw the economy bounce back in the 2nd half of the year from a large GDP quarterly losses in q1 and q2 to modest growth in q3 (q4 is still unknown). 2009 also went from heavy job losses to start the year to essentially break even by the end.
Earnings lead the economy and ultimately drive job creation/losses. Since earnings had already stabilized and recovered modestly by the end of 2002, the economy was already poised to recover in 2003 whereas at the start of 2009, earnings were still dropping. Earnings then bottomed and turned up sharply around springtime which is why the economy was weaker in 2009 vs. 2003...but the economy has recovered to the point whereby job losses are about to turn to gains for the first time in 2 years...we will find out if that's going to be the case this Friday.
The "dumb money" as represented by your typical retail investor/trader is still as skeptical and bearish as they were 6 months ago...if not more. From what I can tell, the typical retail investor took a beating in 2009 despite the market being up 23%. What does that tell you? It tells you the dumb money has been betting against the market almost the entire way up. The bearish group think out there is uncanny.
Here's a list of the concerns that people have about the market
1. commercial real estate is the next shoe to drop
2. the economy is being propped up by government stimulus/incentives. Once they end the economy is toast
3. deficits are too high
4. a big wave of mortgage rate resets is coming
5. consumers are deleveraging
6. Interest rates are going to rise and therefore put a brake on this economic bounce
I'm sure I missed a few more.
Let me tell you something about these concerns....they are WELL KNOWN are likely already incorporated into the market. You can argue with me about this, but since I hear so much about these "time bombs" by typical retail ilk the market must also be well aware of them. Given the solid uptrend of the market it is saying 1 of 3 things regarding the above issues a) the issue won't nearly be as big of a problem as it's cracked up to be b) the issue won't be a problem at all or c) the issue is not going to be major problem for quite some time yet.
I remember in 2003 a huge concern out there was how company pensions were massively underfunded and that this was going to be a huge drag on growth as companies had to divert capital to shoring up their pension plans...no dice there at all for any bears who pinned their hopes on that.
Now, there could always be knee-jerk reactions to bad news or fears in regards to any of the above well known issues that take the market down momentarily. For instance, if the fed decides to raise rates earlier than people expect (consensus on the street is for sometime in the second half of 2010...June at the earliest) then it could be the catalyst for a dip. We saw for example, the market do a knee-jerk sell off on Dubai and Greece concerns.
The bottom line is this....economic momentum has reversed course in a major way from deep negative levels in early 2009 with plenty of room to improve further showing no signs of abating. Leading economic drivers like earnings growth, monetary condition and fiscal spending are still quite bullish for the market, the typical retail investor is still skeptical/bearish and valuations are reasonable (especially in this low interest rate environment) despite the big rebound that already took place. All of this suggests another good year for the market in 2010....but here's a little monkey wrench to throw into this bullish equation....years ending in 0 have ALL been negative since 1910!!! (correction: 1950 and 1980 were actually very good years and 1970 was flat depending on which index you use).
do-do-do-do...do-do-do-do!
They say history doesn't repeat but it often rhymes.....
In 2003 the market started off poorly but made a bear market bottom in March....the same thing happened in 2009.
2003 showed a 26% gain in the SPX with it ending the year at 1111. In 2009 the SPX showed a 23% gain ending the year at 1115.
By the end of 2003 the fed funds rate was 1% and the 10 year bond yield was 4.26%.
At the end of 2009 the fed funds rate was 0% and the 10 year bond yield was 3.84%.
(the funny thing is that by the end of 2004 the fed funds rate rose to 2.25% and the 10 year bond was about 4.16% which was essentially the same level as it was at the beginning of the year! I remember how this baffled the hell out of everyone....will the same thing happen this year if ST rates go up?...I think yes!).
The 12 month forward EPS estimate for the SPX at the end of 2003 was about $65 giving the market a forward P/E of 17 (and the market still went up another 40% over the next 3.5 years).
The 12 month forward EPS estimate for the SPX at the end of 2009 was $77 giving the market a forward P/E of only 14.
Fears of a double dip recession was evident during the recovery 6 years ago and again now (I would say even more so this time around).
What are the differences between 2003 and 2009? The main one would have to be the economy. The economy had turned the corner more so in 2003 vs. 2009. In 2003 GDP growth was mildly positive in Q1 and firmly positive the rest of that year. Jobs were being added in a significant and consistent manner starting in the summer that year. In 2009 we saw the economy bounce back in the 2nd half of the year from a large GDP quarterly losses in q1 and q2 to modest growth in q3 (q4 is still unknown). 2009 also went from heavy job losses to start the year to essentially break even by the end.
Earnings lead the economy and ultimately drive job creation/losses. Since earnings had already stabilized and recovered modestly by the end of 2002, the economy was already poised to recover in 2003 whereas at the start of 2009, earnings were still dropping. Earnings then bottomed and turned up sharply around springtime which is why the economy was weaker in 2009 vs. 2003...but the economy has recovered to the point whereby job losses are about to turn to gains for the first time in 2 years...we will find out if that's going to be the case this Friday.
The "dumb money" as represented by your typical retail investor/trader is still as skeptical and bearish as they were 6 months ago...if not more. From what I can tell, the typical retail investor took a beating in 2009 despite the market being up 23%. What does that tell you? It tells you the dumb money has been betting against the market almost the entire way up. The bearish group think out there is uncanny.
Here's a list of the concerns that people have about the market
1. commercial real estate is the next shoe to drop
2. the economy is being propped up by government stimulus/incentives. Once they end the economy is toast
3. deficits are too high
4. a big wave of mortgage rate resets is coming
5. consumers are deleveraging
6. Interest rates are going to rise and therefore put a brake on this economic bounce
I'm sure I missed a few more.
Let me tell you something about these concerns....they are WELL KNOWN are likely already incorporated into the market. You can argue with me about this, but since I hear so much about these "time bombs" by typical retail ilk the market must also be well aware of them. Given the solid uptrend of the market it is saying 1 of 3 things regarding the above issues a) the issue won't nearly be as big of a problem as it's cracked up to be b) the issue won't be a problem at all or c) the issue is not going to be major problem for quite some time yet.
I remember in 2003 a huge concern out there was how company pensions were massively underfunded and that this was going to be a huge drag on growth as companies had to divert capital to shoring up their pension plans...no dice there at all for any bears who pinned their hopes on that.
Now, there could always be knee-jerk reactions to bad news or fears in regards to any of the above well known issues that take the market down momentarily. For instance, if the fed decides to raise rates earlier than people expect (consensus on the street is for sometime in the second half of 2010...June at the earliest) then it could be the catalyst for a dip. We saw for example, the market do a knee-jerk sell off on Dubai and Greece concerns.
The bottom line is this....economic momentum has reversed course in a major way from deep negative levels in early 2009 with plenty of room to improve further showing no signs of abating. Leading economic drivers like earnings growth, monetary condition and fiscal spending are still quite bullish for the market, the typical retail investor is still skeptical/bearish and valuations are reasonable (especially in this low interest rate environment) despite the big rebound that already took place. All of this suggests another good year for the market in 2010....but here's a little monkey wrench to throw into this bullish equation....years ending in 0 have ALL been negative since 1910!!! (correction: 1950 and 1980 were actually very good years and 1970 was flat depending on which index you use).
do-do-do-do...do-do-do-do!
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