CASE CLOSED: THE DOW ENDS 2012 NEAR 13,500
A step by step study of how I arrive at this conclusion follows: On October 24th, I presented a study titled "How 1987-1992 May Present The Holy Grail For The Market." It is not your traditional correlation study simply providing an overlay of current prices with prices from a similar period. This study looks into how the market of present day is reacting so similarly to an identical trajectory. In order to give you a better understanding of the trajectory, I first want to show a quarterly chart of the Dow going back to the 1932 bottom during The Great Depression: click chart to enlarge It is obvious the tremendous amount of influence this trajectory exerts over the market. The question becomes how does this study relate to present day. Let's first take a look at the exact same trajectory and the stunning similarities between the 1987 and 2008 declines in relation to the trajectory: The similarities in calamitous events have been remarkable thus far, as has been the recovery since. Here is a closer look at the behavior of the current market versus 1987: Now for the money shot. If this study should continue to provide the road map to the current market based on the relation to the trajectory, we know the following: 1. There will be very little downside volatility in the months and years ahead. 2. There will be very little upside volatility in the months and years ahead. 3. The market will be in a very slow and arduous bull market in the years ahead that feels like it is prone to collapse at any moment. Sound familiar? We're already seeing that honey. 4. Declines of any more than 5% should be bought hand over fist. We are currently at a 7.5% decline from the recent peak. 5. This entire decade will not see a bear market. Only corrections within a bull market. Where are we in relation to the 1987-1995 period? Here is your road map. Treat it with the respect it deserves: Let me clear my throat............case...
WRONG SIDE OF THE TRACKS
Today wasn't supposed to happen. It was in the lower ring of any possible outcome given where the important market averages were sitting. It was anomalous. A cancer. A complete and total foreign body. And it must be respected. Every move the market makes tells a story of its past experiences and its future expectations. There is very little that occurs without some sort of underlying intention. There are degrees of intensity that translate into importance within the grande scheme of a short, intermediate or long-term move. However, nothing simply occurs for the sake of occurring. Meaning is littered throughout the averages and individual stock prices. When a cancer (otherwise known as a statistical anomaly) appears in the markets, it has to be assumed that the carrier itself is not functioning as it should in one capacity or another. Take 2008 as an example. There were multiple periods of time where the market should have behaved a certain way at important points of support. Instead, anomalous event after anomalous event took place, warning those who do not simply subscribe to the countless mindless market memes in existence, that there were serious underlying problems in the market. It was a diseased body looking for a place to collapse. Far too often, there are those who adjust their expectations according to the anomaly. In other words, the anomaly is stripped of its repugnant nature and acknowledged as an event that falls within the normal range of expectations. A minority of investors will realize, in time, that anomalous events are the equivalent of a canary in a coal mine. Ignore the canary and your entire party is doomed. I mentioned in the weekly analysis that I DID NOT want to see the S&P 500 fall into a certain range. Unexpectedly, we did exactly that, reaching beyond any reasonable point I had in mind for this pullback. Understand I am not bothered because I have an abundance of exposure. I don't. I am market neutral here, sitting on a majority cash position. What is bothersome is that I am getting further and further away from the possibility of putting any cash to work. Furthermore, it is beginning to look like the possibility exists that my long-term trend indicator will flip to "sell" forcing the portfolios into a 90%+ cash position. On a positive note, halfway through the month the portfolios are up nearly 3% this month, mostly as a result of TZA moving up in price while the remainder of the portfolio has basically sat flat. One thing to smile...
QUICK THOUGHTS
Looking at futures tonight wading through a rather bidless environment. Down some 66 points on Dow Futures 10pm PST. Any weakness witnessed tomorrow needs to be reversed by late day. I am willing to give the market until Wednesday, at the absolute latest, to begin showing its horns. My primary concern with respect to further weakness is in the S&P 500 and its decreasing proximity to its generational trajectory. It will act as an attraction point the closer the market gets, until it simply can't resist. I went over this concern in the weekly chart review on Sunday. That trajectory has a price target of 1320. Again, the market has until Wednesday to get its act together. Weakness past Wednesday deserves some very serious questions going forward. Clock is ticking. The past 30 days may be the least amount of activity I have had in a 30 day period since as far back as I can remember. I have had one small addition to an existing long position. Other than that, I have been doing absolutely nothing, other than sitting on a market neutral portfolio. I remain hedged via TZA, holding a substantial amount of cash and several small-cap long positions. In other words, nothing has changed since I posted my last portfolio update way back on October 10th. Tomorrow should be far more interesting than today was. I'll have more in the morning, if...
4 CHARTS THAT WILL KEEP YOU IN PEACE AND NOT IN PIECES DURING THE WEEK AHEAD
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THE FACEBOOK IPO IN 2012 AND THE YAHOO IPO IN 1996 CONTINUE THEIR STRANGE RELATIONSHIP
In 1996, I traded the YHOO IPO on the day it went public for clients. I remember the sentiment at the time of its IPO was very similar to FB: Unbounded skepticism, followed by valuation propositions that simply didn't add up, topped off with what seemed like a failed IPO at the time. In August of this year, after it was clear that the FB IPO was a complete debacle, I decided to do a comparison to the YHOO IPO based on the memory I had of the perceived failure in 1996. The correlation between the two was astounding. I followed up with another study tracking the correlation a month later. Again, astounding. Here is the third installment of that correlation study, comparing YHOO to FB six months into their respective IPOs along what it means for FB in the months ahead. click chart to...
TIME TO CATCH THE FALLING APPLE
As I was stretching my fingers to prepare for typing this post, I was wholeheartedly prepared to issue a diabolically negative report on AAPL, warning of utter catastrophe and suffering over the long-term for shareholders. In reviewing the long-term price action for AAPL, however, I don't feel that the long-term picture presents enough information to make any concrete determinations of the bullish or bearish nature. There simply isn't enough information to rely on at this point. I can, however, take it one step at a time in presenting a short and intermediate term view of AAPL. First, before the tomatoes come flying onto the stage accompanied by a symphony of jeers, a little history. I will admit to having a bias against companies like AAPL. What I mean by "companies like AAPL" is popular investments with cult like followings. These types of investments invariably end up harming investors because emotions take control of the mental cockpit as opposed to logical analysis. The emotional reaction is further reinforced by group think that is constantly amplified by positive articles, descriptions and experiences with respect to the investment. It simply becomes a recipe for bad decision making. AAPL will not be immune to this to cacophony of sheepish mental disaster. When the ship begins sinking, as it inevitably will, you will see fluffy white coats and bright pink ears scattered all throughout the investing seas. If I can supply a life vest to just one would be victim, my job is done. Over the short to intermediate term, my interest is in demonstrating to readers the risks and potential rewards in AAPL based on price analysis. As an example, in July, following a perceived disappointment in earnings with the stock trading in the 570 range, I said that it was a buying opportunity and the stock would be trading at 700+. More recently, I warned of the fact that AAPL would likely trade in the 520-550 range when the stock was trading above 600 just a few weeks ago. Now that AAPL has fallen into my downside window, the opportunity has shifted. Please click the chart below for a detailed...
WEDNESDAY WAS THE BEGINNING OF THE PROCESS THAT WILL END THE CURRENT MARKET DECLINE
140 characters doesn't serve justice to certain market situations and scenarios. We are in the middle of one of those scenarios now. In order to demonstrate my thinking appropriately, I need a bit more amplification than 140 characters allows. I made a comment on Twitter during trading hours regarding the spike in put/call ratio as the S&P 500 had a rendezvous with the trajectory from the 2009 lows. The very same trajectory that carved out the low in October of 2011 that I bought hand over fist. The identical trajectory that gave us our low in June that was brought to you in living color days before it happened by yours truly. That same trajectory that is now acting as a floor to keep the market from diving off a technical cliff. And the touch of the trajectory is occurring with a spike in pessimism. The perfect recipe. I did make a declaration on Twitter that today's low may be it for the month of November. We are now in the zone where a bottom will more than likely be taking shape over the next few weeks. It could indeed be true that the low for the remainder of 2012 occurred today. At the very least, we have started the process of ending the decline. I'll say it again, today was the first day of the beginning of the process that will end the current decline. Let's take a look at a couple of charts, with notes included, as always. The first shows you the importance of the trajectory we came a hair away from touching today. The second is a demonstration of the put/call ratio with the S&P 500 charted below it: click chart to...
5 CHARTS THAT ARE BEGGING YOU TO DO ABSOLUTELY NOTHING, BUT SIT TIGHT
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FREAKY TALES
With the recent price action, it has become clear that the market is doing its best to force participants into the belief that a demon child is forming in the womb of the financial system. Moves like we experienced on Friday are meant to create a fearful environment that causes participants to either get more liquid, hedge or get short the market. There remains an excess of optimism that is inhibiting the market from moving over the substantial, historical resistance that is directly ahead of it. What Friday did was create a sense of fear in as efficient a form as possible. That efficiency came from the fact that the markets were essentially unchanged for the week. However, the levels of fear increased and the levels of optimism have decreased substantially. I am nowhere near prepared to relieve myself of the substantial burden of having a majority of the portfolio in cash. Nor am I prepared to break away from the comfortable state of being market neutral via the portfolio hedge in TZA. What I am prepared to do is acknowledge that the market are in for a period of unpredictable, choppy, doo-doo stained behavior that is going to repel traders, investors and all those in between away from the markets. Tools to avoid volatility, such as cash and hedging exposure, will continue to be the mode du jour. There is a substantial wildcard, however. The elections. More specifically, the uncertainty that can arise from not having a clear winner. And perhaps even, the surprise that can come from having an unexpected winner. This would increase general volatility. Barring a complete electoral disaster, I don't expect it to sink the market, however. This is a market that seems resolute to chop sideways for the next several weeks. Here is a technical look at the Nasdaq Composite, uncovering some interesting findings: click chart to...
OCTOBER MONTH END SUMMARY AND LOOKING AHEAD TO NOVEMBER
Portfolio October Performance: -9.03% S&P 500 October Performance: -1.98% Portfolio YTD Performance: +33.53% S&P 500 YTD Performance: +12.29% Portfolio Highlights For October: - SPRT was sold for a gain of 40% since initiating the position on August 7th. This was the third successful, double digit percentage profit taken in the stock since the original research report was published on January 29th, 2012. The position was liquidated during the first week of October, as a result of my growing skepticism regarding the market in general. Subsequently, my posture became more defensive as opposed to offensive as the month progressed. - The portfolios were hedged via TZA (3x inverse small-cap ETF) on October 10th. This hedge, along with liquidations of numerous holdings, put the portfolios in a net neutral position early in the month. A defensive posture is warranted given both portfolios performance this month, along with some worrying technical deterioration in numerous important market indicators and indices. - The portfolios started October with 100% long exposure. As of today, that exposure has been scaled back to 45% long, 15% short (45% notional), 40% cash. Portfolio Lowlights For October: - ATNY was liquidated earlier in the month for a loss at an average price of 2.80. The restructuring that has been ongoing at the company seems to have run over in terms of time and damage to the quarterly top and bottom lines. Worries over budgetary concerns within Congress with respect to defense spending also seem to be inhibiting investor participation. Recently, the company did announce that they are exploring strategic alternatives (a sale), hiring a respectable investment bank to assist with the process. I have always thought this was an inevitable outcome. However, I didn't think that the company would sink more than 25% from where I originally purchased it, only to be bought out at a 75% premium. I prefer to have my timing with respect to investments like this a bit more refined. Unfortunately, in this case, that wasn't to be. - PXLW, a company initiated in early August that proved to be quite profitable right off that bat, gave back all of its gains and then some throughout October. The primary catalyst behind the losses in October was an average earnings report and below average guidance. The guidance the company gave fit right in with what a majority of corporate America saw during Q3. That was a dramatic softening during the second half of the quarter. It seems to have intimidated PXLW management enough to the point that they guided down Q4 substantially, causing a 20% decline in the stock to take place on the day after earnings were released. PXLW has...