7 “WHAT-IF?” SCENARIOS DANCING AROUND MY HEAD
Needless to say, the past couple weeks events and the accompanying price action in the financial markets has resulted in a dramatic change of heart in my investment bias going forward. As an aggressive investor/trader in the markets, I have become accustomed to being able to put my ego and opinions aside. It's a fundamental requirement of being able to survive in this game. You must be capable of completely flipping the script should the right set of circumstances come into play, as they have recently. 95% of what I know I share on this website and the various other websites that I contribute to. The other 5% is reserved for my eyes only. I have a couple of proprietary indicators that are somewhat unique. I haven't seen them shared in any other forum. Most importantly, they seem to work very well for determining long-term turning points in the markets. One of them turned bearish this past week for the first time since January of 2008. The other is on the verge. I'm sure I'll share them in time. Right now isn't that time, however. There are a lot of "what if" scenarios that I have been going over in my mind. Here are some to consider: What if the rally we experienced since the 2009 lows was simply a standard retracement of the initial leg down within a multi-year bear market? What if we are in a period in time where range expansions become the norm? What I mean by that is what if all the normalized ranges of highs and lows on every indicator, gauge and expectation you have for market volatility going forward are undergoing a dramatic shift towards expansion? What if the market wants to force the hand of the Fed into decisive monetary stimulus? What if the market wants to force the hand of government to face up to the myriad of problems that we are currently facing? What if the unprecedented volatility of this week is a warning signal that the markets are unstable? What if a major European or US bank go under? Will the system be able to absorb such an event? Why does EVERYBODY see this as a buying opportunity, Donald Trump included? I wouldn't be asking such questions if the market wasn't worrying right along with me. The global markets are telling a story here. The dramatic volatility is a reflection of sudden and intense discomfort. I hate to be a bear. What I hate more, however, is being eaten alive by bear markets. They are relentless. They will take whatever long strategy you have, chop it in half...
YOU WANT 1250 ON THE S&P 500? 2012 MAY BE YOUR YEAR. IT WON’T HAPPEN IN 2011.
This is an angry market. It feels angry. It looks ugly. It wants heads. It wants hearts. It feels like a market that has trapped a lot of traders, fund managers and individual investors. The foot of the market has been implanted firmly on the neck of an entire group of bulls and it seems reluctant to lift its weight off. Those who have been struggling under the weight of the market have only one goal at this point: To stop the pain by raising cash or hedging their positions. The market knows this and keeps dropping the ball further and further down the hole so that those investors who are stuck will have to climb from deeper and deeper depths. This is exactly why I don't think we get too far above 1200 on the S&P 500 again this year. There are simply too many looking for their savior in the form of higher prices. In order to be saved, you have to be liked. And if you're into being liked, then the financial markets are the last you should be. I hear the tuition at clown school is pretty cheap...
NEXT UP ON THE CHOPPING BLOCK: CORPORATE INSIDERS
On August 1st when we were sitting about 13% higher on the S&P 500 I said the following, "We are entering one of those periods where the market is going to become extremely deceptive in its behavior. Contrarian theory will be tested. As will various popular technical indicators. The decline has already managed to pop up on the screen of most technicians as being oversold and overly-bearish. Those who take comfort in such indicators will face pressure in the weeks ahead." I bring this up because of an article I came across yesterday that told of the fact that insiders at corporations across America are buying their stock at what they consider to be attractive prices following the steep decline we have faced recently. The article from CBSMarketwatch can be found here. My immediate reaction was that insider buying as an indicator, given current market conditions, will work just as well as oversold indicators or traditional sentiment indicators that technical investors (myself included) rely on a majority of the time. In other words, its useless. In fact, I will go one step further and say that insider buying is a contrarian indicator of the lack of fear with which this decline has been greeted by the general investment public. While investors will acknowledge that things do seem to be bad in the economy, government and subsequently the markets. The general consensus seems to be that now is a better time to buy for the long-term than sell. Insiders seem to agree. My experience has shown that during emotionally driven declines that become overwhelmingly violent in behavior, corporate insiders are prone to becoming no better than the average Joe in terms of picking a bottom. You want proof? Here's an exceprt from an article published in Barron's by the same author on October 3, 2008: Vickers Weekly Insider Report: Bullish. The ratio of insider sales to insider purchases is well below historical norms, which is a bullish omen, according to this newsletter. The bullish level of this ratio results from both an increase in insider buying and a decrease in insider selling, according to Vickers. "Insiders seem to be bucking the trend of investors in general," the newsletter wrote in its latest issue, dated October 6. The service's two model portfolio are, on average, about 93% invested in U.S. stocks. From the point that Vickers proclaimed that insider buying was a bullish indicator the S&P declined some 30% over the next couple of months. It would have been wise to fade the insiders in October of 2008. It will be just as wise to fade the insiders in August of...
INVESTORS BEWARE: THE MARKET WILL INFLICT MORE PAIN
This article also featured on Forbes Today I'm astounded. Not by the price action of the past seven days. Not by the percentage losses I am seeing in some of the popular momentum plays I follow. But rather by the nonchalant, "this too will pass" attitude I am seeing from a wide variety of investors. The current attitude seems to be one that can't imagine things getting that much worse than they have already gotten. It's a mindset that sees a substantial bounce as being the probable course ahead. Most of the investors I have spoken to seem to think that the S&P downgrade was a nonevent. The markets are overreacting is what I have heard more than anything else over the past couple of days. Perhaps the S&P downgrade was indeed a nonevent. The markets, on the other hand, are not overreacting. What the markets are doing is telling us that something is indeed brewing deep in the bowels of this erratic, violent and relentless beast. Whether or not the S&P downgrade has brought us a step closer to finding out what is bothering the market so much is yet to be determined. However, our bull has come down with a rather serious virus that may not be curable simply by the snapping of one's fingers. I approach the markets with a very simple philosophy that has served me well throughout the years. The philosophy is that the financial markets hate me. They hate you too. In fact, they hate anybody who attempts to pick fruit from its bountiful tree. The markets play on your emotions. The goal is to abuse your weaknesses as a functioning human being. The emotions of fear and greed are the first to be picked apart. Your logical mind is next. Your dependance and pride in your intellect also becomes a victim. The list goes on. The traits that make your friends hoist you on their shoulders and run around a field chanting your name while you wave your hands in the air and make funny faces, can become your undoing in the markets. I bring this up because of the simple fact that investors are acting as if the stock market loves them so much at present that it has corrected some 15% over the past couple of weeks simply to provide them with a favorable entry point so that they can make money for a new kitchen, a red sports car or an expensive trip to an exotic locale. That's what it feels like to me. It feels like investors are confused enough here to think that the market actually loves...
6 CHARTS THAT WILL MAKE YOU LAUGH AND THEN CRY AND THEN LAUGH AND THEN CRY AGAIN
click on charts below to enlarge
FOOLS…DAMN FOOLS
There are a chorus of individuals, strategists and money managers who are telling a story of last night's downgrade of US debt being the capitulation type event that will lead us to a sustainable bottom. Any of you who have been following my thoughts and opinions for more than a week know that I will be the first in line with a list of reasons to be bullish on US equities. I am very bullish on US equities for the long-term, as you well know. However, now is not the time to buy into bullish scenarios of any type. Especially one that has us bottoming on the downgrade of US debt by S&P. The downgrade will have reverberations through the global economy that will trickle out slowly over the next few weeks and months. It's not something that will easily be digested, causing the type of spike down and subsequent move up that marks a capitulation bottom. I recall vividly the same type of capitulation scenario being talked about during the Lehman bankruptcy. It turned out that we had months of work ahead of us for the markets once that event came to pass. This will be much the same. While the economic ramifications of such an event are much different than Lehman, the psychological effects as it weighs on confidence will be very much alike. There will be spikes up along the way. You should use them as an opportunity to raise more cash. There will be tremendous buying opportunities ahead during the most frightening of times. The ammunition needs to be there to take a shot. I'll be putting together a review of a few charts later today or early tomorrow morning. I want to keep it short this week as the technical picture is going to be thrown out of the window. The 1160 to 1250 range on the S&P look like where we should stay for the near future. Below 1160 and things get very ugly, very fast. That's my opinion during this difficult time. More...
THE ONLY TWO CONCERNS AN INVESTOR SHOULD HAVE CURRENTLY
This article also featured on Forbes As a normal investor who has colorful fantasies and nightmares regarding the financial markets, there is a better than even chance that following yesterday's route you have a flood of thoughts swirling around your head. The fact that all of the information contained in the entire world, along with the opinions that come in tandem with that information are at your fingerprints may seem like a blessing during times like this. However, it is more often than not a curse. Simplification is the only answer. There are only two things you need to be concerned with as an investor currently: 1. At what point should I raise more cash? 2. Where will be the point at which I should put that cash to work? That's it. Your problems have all been condensed into two basic questions that you must now answer. For reasons that I outlined in an article I wrote over the weekend, I believe that the S&P 500 is headed for 1160 on the downside, as a minimum target. This downside target is gaining increased credibility as I am not seeing the proper levels of panic amongst investors as of yet. The attitude remains one of "at what point can I buy in for a bounce" as opposed to "the thought of being long the stock market makes me want to vomit". What will get us to that vomit point is a continuing pattern of failures in the market that should take place over the next few weeks and possibly months. Nothing makes traders and investors give up on the long side like a continuing pattern of rallies that fail. That is exactly why you see so much chop around important market bottoms. That chop or volatility is the motion of an ocean of investors not being able to sustain the torment any longer. The fact that we will be experiencing rallies along the way means that investors will have multiple opportunities to lighten up on their long positions. In the midst of the snap back rally you will see a lot of false hope and optimistic expectations that the worst is behind us. It won't be. Barring some type of surprise intervention from the Fed, ECB or combination of the two, there is little chance of a sudden "V shaped" bottom taking place. The damage has simply been too great and there will be too many investors maneuvering into the markets during subsequent rallies. This maneuvering will inevitably cause the choppy, violent movement that is typical of bear raids on the stock market. It's a long, drawn out process that...
S&P 500 AT 1160: THE MINIMUM DOWNSIDE TARGET?
The most relevant aspect of the study I posted to the blog on Sunday may have been overlooked amidst all of the numbers I posted prior. I want to highlight it here as the market seems to be going down this path almost exactly. Here's the bread and butter of the study and what has the potential to make investors the greatest return if properly utilized: The most interesting aspect of this study into the results of excessive pessimism meeting oversold markets is that the last 4 times we have experienced such a dynamic the markets have declined by double digit percentage within the 3 month period each and every time. This is followed, in most cases, by a snap move right back up following a short period of downside volatility. Did you catch that? A double digit decline in the S&P 500 the past 4 times we have experienced the phenomenon of quickly oversold conditions meeting excessive pessimism. And it happens within a 3 month window. What has following typically is a frantic move back up as the excessive pessimism and compressed prices eventually give way to an upside explosion. I think we'll see that here, but it's a ways off. September is the earliest. It could be as late as October. A 10% move from the point the S&P 500 made the signal last week would put us around...
SOME PERSPECTIVE AS TO THE SCOPE OF THIS MOVE DOWN
Nothing will sum it up how widespread the damage has been like an illustration via charts. The following is a long list of a wide range of leveraged ETFs covering everything from Treasury Bonds to Europe. What should be paid attention to in the following charts is the power and conviction with which this move down is occurring. Notice the volume on each ETF. Bottomline is that what we are experiencing now is quite different than the corrections of the past couple of years. The downside remains substantial and the prospect of volatility high. A buying opportunity will come. Not in August, however. click chart to...