Friday, June 12, 2009
What that the false break out today? hmmmm....I'm not sure
why not? Because although we broke 950 we did not close above it. I don't know what to think about this because I don't think today resutled in the bear capitulation I talked about. Anyhow, I don't a good feel for things right in the very ST after today....an upside spike is still on the table though. In a future post I will talking about sectors/plays that appear to be in interesting niches.
Thursday, June 11, 2009
Quick note
One of the other sentiment survey's I follow, the American Association of Individual Investors is still not showing excessive bullishness. Last week it was showing marginal bullishness but this week it's showing an even number of bulls and bears. Now of course, not EVERY indicator has to line up for a turning point to be at hand....rarely does that happen.
Market is now approaching the 950 level. Do we bust out? It definately has a good shot today. Be on guard
Market is now approaching the 950 level. Do we bust out? It definately has a good shot today. Be on guard
Wednesday, June 10, 2009
Warning! Warning! IT top now in sight!
Equities no longer have a solid wall of worry to climb upon....from an intermediate term standpoint. The following reasons are why
1) Massive surge in bond yields. If you look at every IT top in the past 2 years you will see they coincided with a surge in bond yields (I discussed this in a previous post)
2) Investor sentiment as measured by Investor's Intelligence is now showing bulls outnumbering bears by 2:1. This is the highest ratio since November 2007. One major caveat: it is natural to see a surge of extreme optimism during the first rally of a new bull market (like in 2003) without any ensuing significant market downside.
3) VIX approaching mid 20s. Prior to the debacle we saw last year a VIX in the mid-low 20's often coincided with a ST peak. Mind you, we saw the VIX go below 20 for several years in the middle of this decade with no bearish implications. The VIX is still not quite at mid 20's yet but its getting close.
4) Bears are being weeded out and those that remain are at the point of maximum frustration. A lot of bears have been wiped out or crippled by this recent advance and those that remain are furious by the lack of any downside follow through. I noticed that FAZ is no longer the top ticker on stocktwits and the number of traders posting there has dwindled significantly. Most of these traders were shorting the rally day in and day out via FAZ in particular, getting burned over and over again. We are overdue for the market to give these starving bears a little morsel of food.
5) A less talked about (and therefore more effective) contrarian indicator is the ratio of NASDAQ volume vs. NYSE volume. This provides a ratio of speculative seeking activity vs. safety seeking. The higher the ratio the more "greedy" investors are. It has just recently surged to 2.1, and is now at the same levels seen at the prior IT peak in May 2008 and close to levels seen at the bull market peak in 2007.
6) About 56% of stocks in the S&P are trading above their 200 DMA and about 90% are trading above their 50 DMA...similar readings reached at the peak of May of last year.
7) Mutual fund inflows are surging....a bearish contrarian sign. I read an article the other day which said that inflows to emerging market funds recorded a massive surge (over a span of weeks) which rivaled the surge seen just before they made a major bull market top in 2007. It's not just emerging market funds that are showing strong inflows...equities in general are too.
So, does this mean the big bad bear is coming back? Maybe, but my gut says we will just see a tease to the downside for now. I think for now what we could see is decent correction of 5-7% at least. But I think there's a good chance it could begin somewhere above the 950 level. Whatever remaining bears are out there are hanging by their finger nails. I'm quite sure if we break 950 it would cause them to capitulate and retreat to the SPX 1000 level to try and short it again. A break out above 950 would also likely cause capitulation from underperforming long managers who have until the end of the month to show quarterly results.
The bottom line is be very careful now with your long positions. One final surge is still possible here but it would likely result in a false breakout. This rally is now 3 months old and even if this is a new bull market, the initial bull rally off the bottom tends to last for about 3-4 months before a consolidation/correction ensues. More importantly, the favorable sentiment conditions for a further advance have largely deteriorated, in particular, the surge in bond yields and mutual fund inflows which have always been reliable rally stoppers in the past.
I will be on the looking to play the bear side on an IT basis in the coming days/weeks. The next couple of days are tricky because the market is at about neutral levels in the ST, hence, givining it room to make that one last surge.
By the way, I found out the name of that speculator I was talking about the other day. His name is Bernard Baruch and here's that famous quote I mentioned:
"The main purpose of the stock market is to make fools of as many men as possible"
Ain't that the truth? In fact, I am putting this line on my blog header as a constant reminder.
Here's a link to all of Baruch's quotes
1) Massive surge in bond yields. If you look at every IT top in the past 2 years you will see they coincided with a surge in bond yields (I discussed this in a previous post)
2) Investor sentiment as measured by Investor's Intelligence is now showing bulls outnumbering bears by 2:1. This is the highest ratio since November 2007. One major caveat: it is natural to see a surge of extreme optimism during the first rally of a new bull market (like in 2003) without any ensuing significant market downside.
3) VIX approaching mid 20s. Prior to the debacle we saw last year a VIX in the mid-low 20's often coincided with a ST peak. Mind you, we saw the VIX go below 20 for several years in the middle of this decade with no bearish implications. The VIX is still not quite at mid 20's yet but its getting close.
4) Bears are being weeded out and those that remain are at the point of maximum frustration. A lot of bears have been wiped out or crippled by this recent advance and those that remain are furious by the lack of any downside follow through. I noticed that FAZ is no longer the top ticker on stocktwits and the number of traders posting there has dwindled significantly. Most of these traders were shorting the rally day in and day out via FAZ in particular, getting burned over and over again. We are overdue for the market to give these starving bears a little morsel of food.
5) A less talked about (and therefore more effective) contrarian indicator is the ratio of NASDAQ volume vs. NYSE volume. This provides a ratio of speculative seeking activity vs. safety seeking. The higher the ratio the more "greedy" investors are. It has just recently surged to 2.1, and is now at the same levels seen at the prior IT peak in May 2008 and close to levels seen at the bull market peak in 2007.
6) About 56% of stocks in the S&P are trading above their 200 DMA and about 90% are trading above their 50 DMA...similar readings reached at the peak of May of last year.
7) Mutual fund inflows are surging....a bearish contrarian sign. I read an article the other day which said that inflows to emerging market funds recorded a massive surge (over a span of weeks) which rivaled the surge seen just before they made a major bull market top in 2007. It's not just emerging market funds that are showing strong inflows...equities in general are too.
So, does this mean the big bad bear is coming back? Maybe, but my gut says we will just see a tease to the downside for now. I think for now what we could see is decent correction of 5-7% at least. But I think there's a good chance it could begin somewhere above the 950 level. Whatever remaining bears are out there are hanging by their finger nails. I'm quite sure if we break 950 it would cause them to capitulate and retreat to the SPX 1000 level to try and short it again. A break out above 950 would also likely cause capitulation from underperforming long managers who have until the end of the month to show quarterly results.
The bottom line is be very careful now with your long positions. One final surge is still possible here but it would likely result in a false breakout. This rally is now 3 months old and even if this is a new bull market, the initial bull rally off the bottom tends to last for about 3-4 months before a consolidation/correction ensues. More importantly, the favorable sentiment conditions for a further advance have largely deteriorated, in particular, the surge in bond yields and mutual fund inflows which have always been reliable rally stoppers in the past.
I will be on the looking to play the bear side on an IT basis in the coming days/weeks. The next couple of days are tricky because the market is at about neutral levels in the ST, hence, givining it room to make that one last surge.
By the way, I found out the name of that speculator I was talking about the other day. His name is Bernard Baruch and here's that famous quote I mentioned:
"The main purpose of the stock market is to make fools of as many men as possible"
Ain't that the truth? In fact, I am putting this line on my blog header as a constant reminder.
Here's a link to all of Baruch's quotes
Tuesday, June 9, 2009
The next big thing....gold (shorting it)
I was a fan of gold back in late 2000. I was fresh out of university and I was just at the beginnings of my contrarian way of thinking. At the time I was working as an assistant to an advisor and one of my jobs was to scour all of the mutual funds available for his clients to invest in and come up with a short list of the funds I liked. I was very keen on the gold sector for a few reasons:
1) At $285 gold was trading under the cost of production which I believed was about $340 or so making it fundamentally cheap.
2) Absolutely nobody except for the die hard gold bugs wanted to touch gold. The 10 year avg return of the gold funds I was monitoring was about -10%. When gold had its first bull market run in 2001 it was scoffed at. I vividly remembered Cramer and other so called pros doing this.
3) And this is the most important point; in early 2001 gold stocks were quietly outperforming other sectors forming a nice multi-month base. Whenever you see an out of favor sector outperform the market like this, it's a huge buy signal.
When I mentioned to my boss at the time that we should be putting 10% of client’s assets in gold sector mutual funds he resisted initially and of course, like a typical retail investor, he pointed out the previous poor long term returns. I managed to convince him to do this and it paid off big time for his clients.
The mistake I made personally is that I got off the gold train way too early....I've been agnostic about gold ever since it hit about $600 a few years ago but now I'm bearish and I'll tell u why.
Basically, gold is in a bubble right now. Actual physical use of gold has dropped significantly over the past year while investment demand has soared...in 2008 it was nearly double the amount of the 2007. That's a bubble folks. These people were buying gold fearing the end of global financial system was at hand. All commodities except for gold collapsed last year because people don't buy oil and copper when they feel Armageddon is nigh.
So, now that it appears as though we may actually avoid Armageddon we could very well see gold prices collapse quite quickly...weak dollar or not. The "fear premium" in gold is at least $250 if not more. Once that investment demand begins to falter, we will likely see a massive drop in gold.
From a sentiment perspective we've basically come full circle. If 10 years ago you said gold was going to $1000 people would have laughed. Now if you say gold is going to $2000 you would get several nods agreeing with you. Institutional investors wouldn't touch gold with a 10 foot pool 10 years ago...now they all love it. When both retail and institutional investors are fully on board....watch out....who will be the next group of buyers? Aliens?
Earlier this year a cousin of mine who knows absolutely nothing about investing said to me "I heard investing in gold is the way to go". Whenever I hear main street people talk about an investment they feel is good especially after having had a massive run up my contrarian radar goes off the charts. But as with all bubbles, they can get bigger before bursting. Gold has tested the $1000 mark twice and has gotten rejected. Now it's trying for a third time. A technical analyst came on TV the other day saying that gold is forming an inverse head and shoulders and looks poised to break out if it breaks $1000 this time. I've heard several other traders notice this too.
So I'm asking myself....will this break out happen and then eventually reverse to the downside or has gold already made it's peak and it's just starting to tank right now? I'm not so sure....As per the axiom I stated yesterday "the purpose of the market is to make the most amount of people look foolish". If that's the case then gold could very well break out past $1000 in a convincing way to suck in every last person before the rug gets pulled. It's a tough call right now....I'll be watching gold carefully.
1) At $285 gold was trading under the cost of production which I believed was about $340 or so making it fundamentally cheap.
2) Absolutely nobody except for the die hard gold bugs wanted to touch gold. The 10 year avg return of the gold funds I was monitoring was about -10%. When gold had its first bull market run in 2001 it was scoffed at. I vividly remembered Cramer and other so called pros doing this.
3) And this is the most important point; in early 2001 gold stocks were quietly outperforming other sectors forming a nice multi-month base. Whenever you see an out of favor sector outperform the market like this, it's a huge buy signal.
When I mentioned to my boss at the time that we should be putting 10% of client’s assets in gold sector mutual funds he resisted initially and of course, like a typical retail investor, he pointed out the previous poor long term returns. I managed to convince him to do this and it paid off big time for his clients.
The mistake I made personally is that I got off the gold train way too early....I've been agnostic about gold ever since it hit about $600 a few years ago but now I'm bearish and I'll tell u why.
Basically, gold is in a bubble right now. Actual physical use of gold has dropped significantly over the past year while investment demand has soared...in 2008 it was nearly double the amount of the 2007. That's a bubble folks. These people were buying gold fearing the end of global financial system was at hand. All commodities except for gold collapsed last year because people don't buy oil and copper when they feel Armageddon is nigh.
So, now that it appears as though we may actually avoid Armageddon we could very well see gold prices collapse quite quickly...weak dollar or not. The "fear premium" in gold is at least $250 if not more. Once that investment demand begins to falter, we will likely see a massive drop in gold.
From a sentiment perspective we've basically come full circle. If 10 years ago you said gold was going to $1000 people would have laughed. Now if you say gold is going to $2000 you would get several nods agreeing with you. Institutional investors wouldn't touch gold with a 10 foot pool 10 years ago...now they all love it. When both retail and institutional investors are fully on board....watch out....who will be the next group of buyers? Aliens?
Earlier this year a cousin of mine who knows absolutely nothing about investing said to me "I heard investing in gold is the way to go". Whenever I hear main street people talk about an investment they feel is good especially after having had a massive run up my contrarian radar goes off the charts. But as with all bubbles, they can get bigger before bursting. Gold has tested the $1000 mark twice and has gotten rejected. Now it's trying for a third time. A technical analyst came on TV the other day saying that gold is forming an inverse head and shoulders and looks poised to break out if it breaks $1000 this time. I've heard several other traders notice this too.
So I'm asking myself....will this break out happen and then eventually reverse to the downside or has gold already made it's peak and it's just starting to tank right now? I'm not so sure....As per the axiom I stated yesterday "the purpose of the market is to make the most amount of people look foolish". If that's the case then gold could very well break out past $1000 in a convincing way to suck in every last person before the rug gets pulled. It's a tough call right now....I'll be watching gold carefully.
Monday, June 8, 2009
Back to business
Due to CFA studies and other personal stuff I've been somewhat detached from the markets. I'm quite relieved that the CFA studying is over and done with. I hope this is the last exam I ever write. I'm 32 years old now and I feel like I never finished school. When I finished university I would often have dreams that I forgot to do a major assignment or forgot that I had signed up for a class that I did not attend to for the entire year....I still get these dreams!....although less frequently.
I've read the latest weekly piece from John Hussman who I think is a fantastic financial thinker. He’s an economist and money manager who often provides intriguing analysis, although he can be quite technical. I could never be even 25% as knowledgeable about finance and the economy as he is even if I tried my hardest. But he, like everyone else, is not immune from suffering the behavioral finance biases that are mentioned in the CFA level 3 program.
When Hussman takes a stance i.e. bearish/bullish he will defend his stance with confirming evidence even when the market moves significantly in the opposite direction. This is known as confirming evidence trap which is a form of anchoring.
I don't think I've ever heard him say "I was wrong" but rather he uses the "I was early" defense or the "if only" defense. An example of the latter is how Hussman defended his decision of removing hedges from his fund too early last year by claiming that had the government acted in a way that he felt was the right course of action, the market would not have collapsed as much as it did last year.
A famous speculator in the early 1900s (forgot his name) said something like this
"The purpose of the market is to make fools out of the most amounts of people"
I am a true believer in this statement which is why I always look for what would be the most surprising thing the market could do to make most people look foolish.
I haven't looked at enough charts/indicators yet to make a full assessment however I will say this....conditions for this rally had deteriorated significantly, namely, the spike in bonds yields and other factors such as bullish sentiment. However, I STILL don't think the burned bears from the past 3 months have truly given the market respect. They have done so from time to time but they are quick to get negative the moment the market shows any signs of weakness.
Until I see most people FULLY embrace this market instead of looking over their shoulder ever second for the big bear to come back I don't think there is substantial downside risk. It will be like the boy who cried wolf. Only when the people don't believe in the boy anymore will the wolf truly come....in this case it means only when most people don't believe the bear will come back will it come back.
I've read the latest weekly piece from John Hussman who I think is a fantastic financial thinker. He’s an economist and money manager who often provides intriguing analysis, although he can be quite technical. I could never be even 25% as knowledgeable about finance and the economy as he is even if I tried my hardest. But he, like everyone else, is not immune from suffering the behavioral finance biases that are mentioned in the CFA level 3 program.
When Hussman takes a stance i.e. bearish/bullish he will defend his stance with confirming evidence even when the market moves significantly in the opposite direction. This is known as confirming evidence trap which is a form of anchoring.
I don't think I've ever heard him say "I was wrong" but rather he uses the "I was early" defense or the "if only" defense. An example of the latter is how Hussman defended his decision of removing hedges from his fund too early last year by claiming that had the government acted in a way that he felt was the right course of action, the market would not have collapsed as much as it did last year.
A famous speculator in the early 1900s (forgot his name) said something like this
"The purpose of the market is to make fools out of the most amounts of people"
I am a true believer in this statement which is why I always look for what would be the most surprising thing the market could do to make most people look foolish.
I haven't looked at enough charts/indicators yet to make a full assessment however I will say this....conditions for this rally had deteriorated significantly, namely, the spike in bonds yields and other factors such as bullish sentiment. However, I STILL don't think the burned bears from the past 3 months have truly given the market respect. They have done so from time to time but they are quick to get negative the moment the market shows any signs of weakness.
Until I see most people FULLY embrace this market instead of looking over their shoulder ever second for the big bear to come back I don't think there is substantial downside risk. It will be like the boy who cried wolf. Only when the people don't believe in the boy anymore will the wolf truly come....in this case it means only when most people don't believe the bear will come back will it come back.
Tuesday, June 2, 2009
still watching....
something this morning just didn't feel right for me to pull the trigger on the trades I mentioned....my gut is telling me I could be premature in my thesis. Although NEM is down right now the gold index is up solidly and because I'm using NEM as a proxy for the index it would have been luck to have made money on NEM puts and so I'm not regreting anything.
I think my underlying hesistation is due to the fact that although the market is quite overbought it has broken out and the 950 level is line in the sand that could usher in a wave of bear capitulation if breached. Banks are weak today and have been lagging the market as of late.....a warning sign no doubt but the market action is resistant thus far and in the face of fresh rally highs....it's better to err on the side of caution if you want to fade it when something doesn't feel right.
Mabey things will change later on in the day....
I think my underlying hesistation is due to the fact that although the market is quite overbought it has broken out and the 950 level is line in the sand that could usher in a wave of bear capitulation if breached. Banks are weak today and have been lagging the market as of late.....a warning sign no doubt but the market action is resistant thus far and in the face of fresh rally highs....it's better to err on the side of caution if you want to fade it when something doesn't feel right.
Mabey things will change later on in the day....
Monday, June 1, 2009
Big breakout but now overbought....commercial real estate next shoe to drop? Don't hold your breath just yet...
Markets broke out as I expected....but much quicker than I thought and not with good market action i.e. it broke out with a gap up and run. Markets are now very ST overbought and will likely cool off in the next 1-3 days. It wouldn't suprise me to see the bulk of this move get retraced in short order.
So have the bears finally given up? Nope. One by one their ranks are dropping but this is only happening by brute force i.e. accounts blowing up. I still see plenty of the wrong way bears still stubbornly clinging onto their bearish views mostly supported by rear view mirror data.
The next shoe to drop according to bears is commercial real-estate. I even heard one of the BNN anchors mention this worry the other day. Maybe it happens but if you've been in SRS betting on this you have been absolutely crushed like a bug. That's why when it comes to the market timing is EVERYTHING. Being right but early is often just as the same as being wrong depending on how you bet. I have been calling FAZ/SKF/SRS the troika of death not only because these are the bear ETF which obviously do terribly during rising markets but also because they have a "decay" factor when the underlying index is volatile. For example if you buy one of these "investments" and 6 months from now the underlying index it tracks is unchanged but had quite a bit of volatile swings in the interim, it's quite possible for you to be down 30-50% on your eft due to this "decay" factor.
The greater the leverage the more the decay. On the flip side, when the underlying index is in a solid uptrend you get the added benefits of compounding which amplify returns.....it's all in the math of how the returns are calculated....anyhow I digress.
The so called next shoe to drop in the form of commercial real-estate appears to be a widely advertised worry and so if you are bearish you should be concerned that perhaps the market knows this already and doesn't care. Perhaps the economy will revive in time making these worries overblown. Who knows for sure....its quite possible as I've seen before that the market is late in recognizing what appears to be something obvious (because of herd behavior dominating the market) but it could also be the case, as I've also seen before, that by ignoring a well know worry the market was correctly sending the message "you're wrong assholes" like with Y2k fears. This is why it's better to wait for signs the market is agreeing with you rather than being early trying to catch the turnaround because you could very well end up being flat out wrong and lose everything. In my opinion, it's better to miss the first 10-25% of a move and jump in with the wind at your back. But I am a hipocrite because I myself attempt to catch tops/bottoms but I will only do so with a)limited capital b)when I believe the set up is near perfect (extremes in indicators and some confirmation of a reversal or panick). This allows me to get out with limited damage if I'm wrong.
I'm sure quite a few people can provide me with convincing statistics, charts and arguments as to why commercial real estate is the next shoe to drop but until the market gives the thumbs up and shows signs of it paying attention to this potential problem I won't bet on it aside from a short term trade. Those who have bet on it have been taking horrific losses. Maybe they will be vindicated....maybe not. I'd rather wait for some sign of confirmation first. So you miss the bottom, big deal. Those who have been anxious not to miss the bottom are regretting big time now.
I am once again looking to buy puts on NEM. Gold and gold stocks did a nice downside reversal today in the face of a very strong market. The sector is quite overbought and talks of the dollar and commodities are at fever pitch levels. At the very least a nice pullback appears immanent. Hopefully I will be able to get a decent entry point.
I am also considering a long position on the yen via calls on FXY. More on this later....
So have the bears finally given up? Nope. One by one their ranks are dropping but this is only happening by brute force i.e. accounts blowing up. I still see plenty of the wrong way bears still stubbornly clinging onto their bearish views mostly supported by rear view mirror data.
The next shoe to drop according to bears is commercial real-estate. I even heard one of the BNN anchors mention this worry the other day. Maybe it happens but if you've been in SRS betting on this you have been absolutely crushed like a bug. That's why when it comes to the market timing is EVERYTHING. Being right but early is often just as the same as being wrong depending on how you bet. I have been calling FAZ/SKF/SRS the troika of death not only because these are the bear ETF which obviously do terribly during rising markets but also because they have a "decay" factor when the underlying index is volatile. For example if you buy one of these "investments" and 6 months from now the underlying index it tracks is unchanged but had quite a bit of volatile swings in the interim, it's quite possible for you to be down 30-50% on your eft due to this "decay" factor.
The greater the leverage the more the decay. On the flip side, when the underlying index is in a solid uptrend you get the added benefits of compounding which amplify returns.....it's all in the math of how the returns are calculated....anyhow I digress.
The so called next shoe to drop in the form of commercial real-estate appears to be a widely advertised worry and so if you are bearish you should be concerned that perhaps the market knows this already and doesn't care. Perhaps the economy will revive in time making these worries overblown. Who knows for sure....its quite possible as I've seen before that the market is late in recognizing what appears to be something obvious (because of herd behavior dominating the market) but it could also be the case, as I've also seen before, that by ignoring a well know worry the market was correctly sending the message "you're wrong assholes" like with Y2k fears. This is why it's better to wait for signs the market is agreeing with you rather than being early trying to catch the turnaround because you could very well end up being flat out wrong and lose everything. In my opinion, it's better to miss the first 10-25% of a move and jump in with the wind at your back. But I am a hipocrite because I myself attempt to catch tops/bottoms but I will only do so with a)limited capital b)when I believe the set up is near perfect (extremes in indicators and some confirmation of a reversal or panick). This allows me to get out with limited damage if I'm wrong.
I'm sure quite a few people can provide me with convincing statistics, charts and arguments as to why commercial real estate is the next shoe to drop but until the market gives the thumbs up and shows signs of it paying attention to this potential problem I won't bet on it aside from a short term trade. Those who have bet on it have been taking horrific losses. Maybe they will be vindicated....maybe not. I'd rather wait for some sign of confirmation first. So you miss the bottom, big deal. Those who have been anxious not to miss the bottom are regretting big time now.
I am once again looking to buy puts on NEM. Gold and gold stocks did a nice downside reversal today in the face of a very strong market. The sector is quite overbought and talks of the dollar and commodities are at fever pitch levels. At the very least a nice pullback appears immanent. Hopefully I will be able to get a decent entry point.
I am also considering a long position on the yen via calls on FXY. More on this later....
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