Europe...it's that pimple that won't go away. This is the 3rd spring/summer in row now whereby problems with PIIGS are spooking the market. Markets have been reeling primarily on fears of what seems to be the likelihood of a Greece exit from the euro and the threat of broader european destabilization it brings with it . We had these same fears last year but Greece was able to secure bailout funds. This time there's a lot more political turmoil in Greece and the ECB has been pulling the plug on some Greek banks it believes are insolvent, thus signaling a Greece exit could be next. So, is the market's decline due these events justified? To some degree yes. Remember, the market had a blistering run from November to April and was on pace to rise a practically impossible 50% for the year at the recent peak. Something.... anything would have eventually caused things to cool down and these Greece fears are a good excuse as any. But now with the SPX at 1300, up only 3% YTD, it's no longer "ahead of itself" as it's on pace for about an 8% gain for the year and that certainty doable.
On the sentiment front there's good and bad news. The good news is that the bull's "fuel tank" is quite full. If you look at the last time the market was at 1300 in late January, AAII sentiment was 2:1 bulls vs bears, about 85% of stocks in the SPX were trading above their 200 DMA and the 50 DMA, while the 10 DMA of the put/call ratio was about 0.85....the tank was closer to empty than full. Now, with the market back at 1300 again, it's a totally different set of stats. AAII sentiment is 2:1 bears vs bulls, 40% of stocks in the SPX are trading above their 200 DMA , 14% are trading above their 50 DMA and the 10 DMA of the put/call ratio is at 1.18. The market is as oversold as it was near the depths of the flash crash in 2010. It did get more oversold during the depths of last year's decline though, but the point here is that the market is now sufficiently oversold to build the foundation for a very big rally to new highs...if that's what in the cards.
Now for the the bad news. The downside momentum has been decidedly nasty and with the market closing at the low of the day on Friday, it indicates that either the downside is not over yet or that quite a bit of base building will be required if at best case we have seen the worst. Next, there is somewhat of a lack of panic in the VIX. Also, Rydex and NAAIM sentiment is still not bearish enough especially Rydex sentiment. I suspect this will change very soon but until it does, they remain important holdouts.
Bottom line: Most of the damage has probably been done and there's enough gas in the tank for a massive rally once the market finds it's bottom, but with the market closing right at the low of this "correction" you have to respect the likelihood of at least a little more downside. Having said that though, the market is very ST oversold and a big bounce can happen any day now. We could be in situation similar to late May of 2010 or early August of 2011 whereby the market was close to making the first of several bottoming attempts. Those were solid LT buying opps but you had to go through the ringer several more weeks which included moderate new lows before you were rewarded. So on that note, if you don't believe the end of world is forthcoming due to Greek default/exit, get your shopping bags ready and start picking away at LT buys. However, you have to be prepared and willing to endure the potentially large knee jerk gap down that would likely take place should Greece default/exit.
I personally had a great week last week after several weeks of nothingness with tends to be the case with me given my affinity for small cap names. I was going to write a post soon about how I was struggling to find my grove this year but then my largest holding by far hwo.to, had a huge couple of days starting right on my birthday to boot! I talked about the stock here before. They recently announced blowout earnings and initiated a substantial monthly dividend for the first time. So far every year since I've been trading/investing full time, I've been able to identify 1 or 2 stocks that have done really well, powering my performance. You always wish you had more invested when you catch a big winner but this time though, keeping with my "brass balls" resolution for this year, I took 25% position in the stock before it had this big run. 25% is the absolute maximum I would ever allocate to one single stock and I would only do so if my conviction was very high and it was. A lot of people might think that a 25% position in any one stock is too aggressive but here's what I say...I'm not playing this game just to get mediocre results. I want to make big money and that means making the big bets if and when the great opportunities present themselves. At the same time though, I realize there's a fine line between being courageous and being reckless which is why I limit my convictions to a 25% maximum bet on one stock and 35% maximum sector exposure, for if I get it wrong big I'll be hurt but not wiped out or badly crippled. If I ever make such a concentrated bet though, all the ducks have to be lined up.
Now that I talked about hwo.to and all this "conviction" bullshit, watch it tank next week to humble me. Well, it would not surprise me to see at least some profit taking after a 50% jump in 2 days but like Livermore preached "be right and sit tight". I was right about hwo.to and so now I will sit tight not out of greed but because the stock is still quite undervalued in my book and so should eventually work higher. If the stock pops another 25-30 cents early next week though, I may do a little trimming and try to trade around the bulk of the position.
Oh ya...I forgot to talk about facebook....the biggest IPO in recent years...I couldn't give a rat's ass about it. First of all I almost always stay away from IPOs because they tend to be overpriced. The only one I liked in recent years was Lulu Lemon and if not for the financial collapse in 2008, that one would have been like Google's IPO which took off and never looked back. Lulu is now miles above it's IPO price. I read once a stat that said something like the majority of IPOs will trade below their opening price 6-12 months after they debut...that seems to be true based on my experience.
Sunday, May 20, 2012
Friday, May 4, 2012
Time to go for the gold?
First some comments about the market. Another disappointing non-farm payroll report today. That makes it 2 in a row now. Concerning? Just a little bit but again, this inability for robust job creation is not unusual given what tends to happen in the first few years of post housing bubble recoveries. This "stop and go" recovery has everyone frustrated. The bears are frustrated because they've never let go their expectations of armageddon since the crash while optimists are frustrated that the recovery can't shift into that higher gear. But in the end when it comes to the stock market it's all about earnings and liquidity and those trends are still robust. After today's close the market is now officially in a sideways IT trend. Should that really be surprising given the move we had from November to March? How many times did I say that the market was on pace for an unsustainable 40-50% gain earlier in the year? At some point the market had to rest regardless of the reason(s) for it.
Now I'm sure a lot of people out there are bracing for another big spring/summer drop like what happened in 2010 and 2011. The 2 major differences between now and then are...you guess it...fund flows and bond yields especially the latter. It bears repeating that just prior to the peaks in 2010 and 2011 the long bond had been selling off significantly for several weeks wheres this time it hasn't. That argues for a more muted consolidation phase this time around.
I'm noticing the housing market in the US is showing signs of a pulse. This is captured by NAHB housing market index which is at a 5 year high at 25. Mind you, 25 is still a very low reading as anything under 50 signals weak conditions, but at least it's heading in the right direction. The homebuilders ETF (ticker XHB) has been an out performer this year. This is good news for the bulls longer term because housing needs to find its footing for the economy to become self-sustaining and get itself off life government/fed life support. I'm also noticing that the oil price is finally comming down. Commodities in general have declined a notable amount since last year all except for oil. Energy prices have been stubbornly elevated and if they can come down it would give emerging market countires like China more incentive to take aggressive easing measures
Ok now let's talk about the title of this post...gold. First of all let me say that at current prices, I'm not a LT believer in gold. In a previous post I discussed how gold had risen far above what was justified relative to the decline in the US dollar. Gold is an example of how a bubble is formed. At first, the rise in the asset is justified given a positive fundamental backdrop but then people take it too far. That's what happening with gold in my view. I was bullish on gold in early 2001 when it was around $270. At the begging of the gold bull market it was trading below the cost of production while the US dollar was overvalued. Nobody but the die hard, tin foil hat wearing gold bugs who were relics of the 70's, was interested in gold...the herd was still focused on bagholding their favorite tech stocks. When the gold bull market made its first big rally to $350 guys like Cramer an Kass ridiculed the bulls. I remember it very clearly. I also clearly remember some "pro" on CNBC saying that gold should be traded not invested in. Fast forward 10 years and most "pros" including Cramer are now advocating holding gold for the LT at $1600+. Go figure. Herd mentality folks...even the so called pros are victims of it.
The trade weighted US dollar has declined about 35% from it's peak in 2001 which surely deserves a higher gold price but is a 500% rise justified? I don't think so. Thanks to the combination of a equity secular bear market, doomsday propaganda and the creation of gold backed ETFs like GLD, the boom in gold turned into a bubble. While it's certainty arguable and perhaps impossible to know what the true fair price of gold is, I'd say it's closer to $700 than $1700. Now, it doesn't matter what I think and even if I'm right it could take years before gold trades to $700. In the meantime, as a investor/speculator, I have to play the cards that are dealt and right now despite all I've said, gold actually looks like it could be just about ready to make another leg up! Here's the way I see it. If gold was in a bubble and the bubble popped last August, it should have crashed 35-50% by now. That's how bubbles pop. Instead, gold dropped about 16% in September and has basically traded sideways since. That to me suggests the gold bull market, although aged is still not over. Bubbles, especially when dealing with emotionally charged assets like gold, don't end with a whimper like this. While there can always a be first, you have to go with the odds and the odds suggest the gold bull is still alive. From a trader sentiment perspective, the enthusiasm for gold has certainty cooled since it peaked last year. Mark Hulbert just reported that gold market timers are net short gold 15% which has coincided with ST/IT lows in the past. Public opinion of futures traders are at 55% bulls which is near the bottom of the LT range that has been in place over the past several years with 85% on the high side and 45% on the low side which was touched in late December. I'm contemplating LT calls on GLD and/or SLV here but make no mistake, such a bet would be a pure speculative play. There's no "investment" conviction to this and that's fine by me. I have no problem making a pure speculative bet if 1) I think there's a good edge and the risk/reward is worth it and 2) I'm only risking a small amount. If I go ahead with the calls, it would be an "all in" type bet where I make the bet and I'm committed. No stops. For instance I would buy the 2013 January or March GLD $170 call. If I'm right and gold has another upleg starting soon, I stand to more than double my money. If I'm wrong I risk losing 100%. I'm going to take the weekend to think about this trade.
I just read an article on marketwatch describing the outlook of some key commodities by some trader. He has pretty much the same view on gold as I do but he has a clearly different take on nat gas. Here's what he said
“We have such a huge supply of natural gas in this country, more gas than can be consumed.”
“I have no desire to be involved in natural gas whatsoever,” Brandt said. “I don’t think there’s any way for an investor to make money.”
My response to his first statement is one word: "duh". By now, even my grandmother is aware of the oversupply condition in nat gas. This is old news. And don't you think that maybe, just maybe with nat gas collapsing from already low prices in the $3-4/mcf level to $2/mcf, it reflects this oversupply issue and more? I just described earlier how the herd tends to take things too far like with gold. Clearly, the supply/demand imbalance for nat gas has not been appealing but does it deserve to punished this badly given it's trading far, far below the avg cost of production and the energy equivalent value of oil? Not to mention the desire from practically every nation in the world to be less oil and coal dependent and more environmentally friendly. My response to his 2nd statement is that these are the exact sort of things you hear people say at the bottom of a bear market when an asset is fundamentally cheap and nobody wants to touch it. It seems like we're at or very close to the point of maximum pessimism as Templeton would say.
Now I'm sure a lot of people out there are bracing for another big spring/summer drop like what happened in 2010 and 2011. The 2 major differences between now and then are...you guess it...fund flows and bond yields especially the latter. It bears repeating that just prior to the peaks in 2010 and 2011 the long bond had been selling off significantly for several weeks wheres this time it hasn't. That argues for a more muted consolidation phase this time around.
I'm noticing the housing market in the US is showing signs of a pulse. This is captured by NAHB housing market index which is at a 5 year high at 25. Mind you, 25 is still a very low reading as anything under 50 signals weak conditions, but at least it's heading in the right direction. The homebuilders ETF (ticker XHB) has been an out performer this year. This is good news for the bulls longer term because housing needs to find its footing for the economy to become self-sustaining and get itself off life government/fed life support. I'm also noticing that the oil price is finally comming down. Commodities in general have declined a notable amount since last year all except for oil. Energy prices have been stubbornly elevated and if they can come down it would give emerging market countires like China more incentive to take aggressive easing measures
Ok now let's talk about the title of this post...gold. First of all let me say that at current prices, I'm not a LT believer in gold. In a previous post I discussed how gold had risen far above what was justified relative to the decline in the US dollar. Gold is an example of how a bubble is formed. At first, the rise in the asset is justified given a positive fundamental backdrop but then people take it too far. That's what happening with gold in my view. I was bullish on gold in early 2001 when it was around $270. At the begging of the gold bull market it was trading below the cost of production while the US dollar was overvalued. Nobody but the die hard, tin foil hat wearing gold bugs who were relics of the 70's, was interested in gold...the herd was still focused on bagholding their favorite tech stocks. When the gold bull market made its first big rally to $350 guys like Cramer an Kass ridiculed the bulls. I remember it very clearly. I also clearly remember some "pro" on CNBC saying that gold should be traded not invested in. Fast forward 10 years and most "pros" including Cramer are now advocating holding gold for the LT at $1600+. Go figure. Herd mentality folks...even the so called pros are victims of it.
The trade weighted US dollar has declined about 35% from it's peak in 2001 which surely deserves a higher gold price but is a 500% rise justified? I don't think so. Thanks to the combination of a equity secular bear market, doomsday propaganda and the creation of gold backed ETFs like GLD, the boom in gold turned into a bubble. While it's certainty arguable and perhaps impossible to know what the true fair price of gold is, I'd say it's closer to $700 than $1700. Now, it doesn't matter what I think and even if I'm right it could take years before gold trades to $700. In the meantime, as a investor/speculator, I have to play the cards that are dealt and right now despite all I've said, gold actually looks like it could be just about ready to make another leg up! Here's the way I see it. If gold was in a bubble and the bubble popped last August, it should have crashed 35-50% by now. That's how bubbles pop. Instead, gold dropped about 16% in September and has basically traded sideways since. That to me suggests the gold bull market, although aged is still not over. Bubbles, especially when dealing with emotionally charged assets like gold, don't end with a whimper like this. While there can always a be first, you have to go with the odds and the odds suggest the gold bull is still alive. From a trader sentiment perspective, the enthusiasm for gold has certainty cooled since it peaked last year. Mark Hulbert just reported that gold market timers are net short gold 15% which has coincided with ST/IT lows in the past. Public opinion of futures traders are at 55% bulls which is near the bottom of the LT range that has been in place over the past several years with 85% on the high side and 45% on the low side which was touched in late December. I'm contemplating LT calls on GLD and/or SLV here but make no mistake, such a bet would be a pure speculative play. There's no "investment" conviction to this and that's fine by me. I have no problem making a pure speculative bet if 1) I think there's a good edge and the risk/reward is worth it and 2) I'm only risking a small amount. If I go ahead with the calls, it would be an "all in" type bet where I make the bet and I'm committed. No stops. For instance I would buy the 2013 January or March GLD $170 call. If I'm right and gold has another upleg starting soon, I stand to more than double my money. If I'm wrong I risk losing 100%. I'm going to take the weekend to think about this trade.
I just read an article on marketwatch describing the outlook of some key commodities by some trader. He has pretty much the same view on gold as I do but he has a clearly different take on nat gas. Here's what he said
“We have such a huge supply of natural gas in this country, more gas than can be consumed.”
“I have no desire to be involved in natural gas whatsoever,” Brandt said. “I don’t think there’s any way for an investor to make money.”
My response to his first statement is one word: "duh". By now, even my grandmother is aware of the oversupply condition in nat gas. This is old news. And don't you think that maybe, just maybe with nat gas collapsing from already low prices in the $3-4/mcf level to $2/mcf, it reflects this oversupply issue and more? I just described earlier how the herd tends to take things too far like with gold. Clearly, the supply/demand imbalance for nat gas has not been appealing but does it deserve to punished this badly given it's trading far, far below the avg cost of production and the energy equivalent value of oil? Not to mention the desire from practically every nation in the world to be less oil and coal dependent and more environmentally friendly. My response to his 2nd statement is that these are the exact sort of things you hear people say at the bottom of a bear market when an asset is fundamentally cheap and nobody wants to touch it. It seems like we're at or very close to the point of maximum pessimism as Templeton would say.
Subscribe to:
Posts (Atom)