I'm finally seeing signs of complacency/greed from the trading community. During the past few days, traders have been piling into calls sending the 10 DMA of the put-call ratio to 0.80 which is consistent with ST tops. Plus, this heavy call buying of late is happening in the face of a flat market. That's unjustified optimism i.e. greed and also typically what you see near short term tops. Next, Mark Hulbert from Marketwatch.com has noted that the average market timer he keeps tabs on is 60% long. Anything over 50% has typically been associated with ST tops. I've also been noticing some permabear types trying to reinvent themselves by "going with the flow" instead of always trading with a bearish bias. Therefore, they have been positioned long. lol! Where the fuck were you idiots 15% ago? These clowns are weak longs and will get easily shaken out on a 1.5-2% dip because they are still bears at heart. Remember what I said several weeks ago....a correction will only happen once enough weak shorts have been shaken out and weak longs sucked in. I think we are at or very close to this point when you got option traders, market timers and some normally would be permabears positioned long.
I noticed Cisco tanked hard after hours sending the futures in the red. Will that be the catalyst for the correction? I'm not so sure but again, regardless of what Cisco reported, the market is now quite vulnerable for the next few weeks so be careful. This doesn't change my long term outlook which is still bullish. Nor should you dump all your stocks just to avoid a correction. If they are strongly correlated to the market then it would be prudent to lighten up or take a defensive strategy such selling covered calls or setting up a collar. My stocks are for the most part fairly non-correlated with the market and I'm quite confident in their company specific fundamentals so I'm not going to take much action unless it warrants it for company specific reasons. I may consider a small speculative downside bet in the way of OTM March index puts. It would also serve as an insurance policy just in case my stocks do start moving in unison with the market.
Although we are seeing signs of froth from trader types, nothing has changed in regards to the underlying long term skepticism/bearishness in the market which is why I remain bullish longer term. If recent history repeats, the excessive bullishness currently being exhibited by traders types will likely unwind quite quickly if the market dips 2-3% because these jokers are just "going with the flow"....they don't truly believe in the bull market. Next thing you know they will be piling into puts near the bottom. I'm getting ahead of myself here. Let's see the "correction" happen first.
Morgan Stanley had a note out today saying equities are "crazy cheap" and this bull market still has 2 more years to run.
ReplyDeleteLink here -> http://www.reuters.com/article/idUSN1019958920101110
I read the article and I agree with most of it, except that fact that I believe prior time in history, before the mid-term election, stock market general is flat or up a little. This is not the case this time, we had a great September and October and coming into the mid-term election, there is a lot of good news been priced in. So I do not buy this argument.
Short term wise, I am cautious as well. I am just trading intra-days these days and not leaving much on the table overnight. But longer time I do agree with the bullish thesis.
these guys are bullish because of valutations adjusted for interest rates...the so called "fed model". There are flaws with this model. The argument goes that stocks deserve higher valutations the lower interest go because fixed income becomes more and more unattractive as an alternative to stocks. However, low interest rates could possibly be a signal that there will be deflation/economic weakness ahead and if that happens to be the case corporate profits would collapse and so therefore stocks aren't as cheap as they seem.
ReplyDeleteThe flaw in the fed model was exposed in 2007. According to the fed model, stocks were still considerd undervalued. It gave bulls a lot of hope that the downturn in equities would be mild.
Now having said all this, lets imagine a senario where interest rates are low and stable for the next 10 years because the economy was operating below capacity and/or due to healthy competative forces keeping a lid on inflation and NOT because of the market's expecation of a deflationary reccession. This would be an enviroment where the fed model would be absolutley correct in arguing that stocks are extremely cheap.
which brings us to the conclusion that economic models are useless as far as predicting where prices are going since arguments can be made for both sides of the story...
ReplyDeletethe problem with economic models is that they often make simple assumptions including the assumption that every economic cycle is the same and that people always act rational. Neither is ever true. This is why predicting the economy and the stock market is just as much if not more an art than a science.
ReplyDeleteThere is one thing that is always true about people and that is the "herding" behaviour, and thereby leading to trends.
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