3 CHARTS THAT ARE RATHER BORING BUT NEVERTHELESS POINT TO HIGHER PRICES IN THE WEEK AHEAD
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IS THE KEY TO ANY MARKET TOP BURIED IN THIS PRICE TARGET FOR THE SOX?
Guess you can call me old school. I am a firm believer in the SOX being a leading indicator for the markets either on the bear or bull side of the equation. I will admit that the elegance of the SOX as an indicator has diminished somewhat over the past few years. It is still extremely relevant, however, as I will demonstrate here. On November 25th of last year, I posted an article titled "A Study Of The Cyclical Nature Of The SOX Giving Rise To A 1-2 Month Price Target." Not only was that title unnecessarily long, but it may turn out to be completely accurate. Those who are constantly searching for that elusive short-term top to this market may be best served to pay attention closely to the SOX over the next few weeks. The study was posted on November 25th with the SOX at 369. The 1-2 month price target posted was 420. A predicted rise of some 14%. As of the close Friday, the SOX is sitting at 403. Here is a look at the original chart, with price target. This is followed by an updated chart as of the close...
HOW CONTRARIAN THEORY BRINGS OUT THE STUPID IN SPECULATORS
Stupidity can be viewed in full abundance every single day in the financial markets. There are microscopic incidences such as when a retiree invests in a Chinese coal miner thinking that it will make a prudent investment for his family's future. Only to find out a short while later that what he thought was a coal manufacturer in China was an enterprise solely dedicated to targeting those who suddenly think that by reading an article about China in BusinessWeek they have the understanding necessary to become the American version of Zong Qing Hou. Stupid. Then there are grand effigies built to the pursuit of stupidity. We saw a sweeping display of this recently when Bill Ackman of the hedge fund Pershing Square made a proud testimonial to his discoveries of fraud in the case of HLF. A two hour presentation documenting why he is the majority of HLF's short interest was on display for all to see. He may as well have walked through Harlem wearing a white robe and a pointy hood. Nothing says "I want a beat down" in the market like gloating in the face of all your peers about your enormous short position while tempting company management to come after you as you allege blatant fraud. No one wants to complicate their professional life that much...do they? One area of the market where a perpetual form of stupidity is on display is in contrarian theory. I will start by saying that the core of my belief with respect to the markets is rooted in the fact that financial markets are inherently deceptive in nature. Deception is as core to financial speculation as a bid and offer. Therefore, it would make sense for me to embrace contrarian theory in the markets, as I do wholeheartedly. Seeing a sign posted on the wall of Paul Tudor Jones office reading "WHAT IS OBVIOUS IS OBVIOUSLY WRONG" when I first watched the documentary "Trader" in the 90s was a revelation. Being a contrarian is essential to success in the markets. However, being a stupid contrarian is not. What is a stupid contrarian? One who simply looks at every indicator of investor sentiment that is pointing to anything remotely bullish and sees that as reason to believe that an end to an uptrend is within spitting distance. As an example, the buzz-worthy contrarian indicator of this past week was the fact that equity mutual fund inflows suddenly saw a spike in allocation not seen in years to start off 2013. This was automatically seen as an indication that the retail investor had returned to the market, thereby automatically putting a lid on any...
WHERE IS ALL THAT WEIRD COMING FROM?
Brand new years always have a certain weird quality attached to them. First, a new year is somewhat of a depressing time. We emerge from the warm, cozy nature of the holiday season, where everything is familiar and inviting, only to find ourselves in an unfamiliar new environment. People who have been residing on their couches with bags of licorice and grape soda are suddenly drawn a gymnasium in an effort to push the unfamiliar onto themselves for the sake of improvement. Others are forming the strategy to escape from whatever it is they think is a detriment to their happy being, whether a job, relationship or one of the dozens of vices there is to choose from. It is as if a new, unfamiliar year causes us to embrace unfamiliarity in everything that we do. No wonder so many resolutions go unfulfilled. The market environment is much the same. As investors and traders, we are suddenly thrust into a reset environment where new targets, expectations for performance and dilemmas await our attention. While the markets seemingly haven't changed much simply because of the flip of the calendar, they sure do seem different with every new year. The first couple weeks of 2013 have just reinforced this idea...perhaps, more than ever. If the first nearly two weeks of trading are any indication, then 2013 is going to have a super sized portion of weird thrown into the mix. We started the year with that enormous Fiscal Cliff resolution gap up that automatically caused 95% of fund managers to start the year trailing their benchmark. We have since gone absolutely nowhere. All the meanwhile, leadership is rotating like the barrel of a Gatling gun. Apple is a laggard. Facebook is a leader. Transports continue to show strength. The Semiconductor Index does little to nothing on a daily basis. Mass discombobulation on a nuclear scale. It is an absolute bombardment of weird. But don't fret, corporate America will come to the rescue over the next couple of weeks with a bonanza of earnings that are sure to give us some ammo from which rational market action can be born. Lots of weird to start 2013. Here is to normalcy being born out of a struggle with the unfamiliarity in whatever the markets chooses to do in the year...
PORTFOLIO UPDATE: ALWAYS LOOKING STEPS AHEAD
During the trading day, I tweeted the following: The liquidation of PXLW has nothing to do with the fundamentals of the company and everything to do with the lack of performance out of the name since I initiated the position in early August. My system for adding to and liquidating positions is based strictly on price performance. I hardly ever average down. I only average up. As the old saying goes: losers add to losers. A core concept that will make you a better investor the sooner you grasp onto it. I think it is important for me to attempt to demonstrate how I am thinking about the construction of the portfolio at this exact juncture in order to understand my decision making here. I am right at the 75% invested of equity mark. By next week, I may take that back up to between 90 to 100 percent invested in some new names. The month of January has brought with it a slight drawdown of a little less than 2% for the portfolios. Those of you who have been following along know that I have a number of risk cushions in place that serve to smooth out my equity curve for my own sanity and for the comfort of my investors. While I believe in my ideas wholeheartedly due to the research and understanding behind each one of them, I also believe in the fact that downside momentum in the market has a way of making even the best ideas turn into chopped liver. Each one of my risk cushions acts as a preventive barrier that keeps the portfolios from giving back an amount of equity that will cause me to take excessive risk in order to make up for the shortfall. I don't ever want to be in a position where the portfolio determines my course of action. Every step is pre-planned well in advance. As an example of pre-planning, the near 2% drawdown I am facing this month puts a halt on any new portfolio positions until the drawdown gets to the point of being less than 1%. At that point, I will consider taking on new positions. The reason for this precautionary measure is due to the fact that I have another risk cushion at the 5% drawdown mark for the month. If, during any single month, the portfolios lose 5%, I cut exposure in half. This is, by the way, supplementary to my trend indicators which are a means of cushioning general market risk. If I am 300 basis points away from the 5% drawdown point (where I am now), it makes no sense...
4 CHARTS TELEGRAPHING EXACTLY HOW MUCH UPSIDE REMAINS IN THE MARKET
The market did manage to clear up some of the rain clouds overhead this week. Now that the Congressional circus has been put to bed, the market is free to focus on a consistently lubricated economic picture, as well as an earnings picture that may turn out to be brighter than expected. With that said, here are some of the upside targets in the weeks and months ahead: click chart to...
SYMMETRY AND IVORY LIVING TOGETHER IN PERFECT DISHARMONY: STARRING AAPL
In what can only be classified as a cantankerous start to the year, shares of AAPL have been forgotten by the market in favor of names like Bank of America and Delta Airlines. It suddenly seems as if society, as a whole, has become more dependent on refinancing their trailer home or buying an airline ticket to Nantucket, as opposed to having any reliance on all of the technological delights AAPL has brought us, in machine gun repetition. The fundamental developments involving such a turn of events are always delayed in revealing truths. We must, therefore, rely on the technical aspects of AAPL to tell us whether the market has developed a sense of Pinocchio driven disdain for current shareholders, only planning on reversing higher in short order OR if this is indeed a new reality for this former market leader. I have spoken often about the virtues of observing symmetry in a stock or an index. My definition of symmetry, simply put, is a stock or index that acts as it should in relation to important support and resistance points in the market. A stock that is exhibiting bullish symmetry will act perfectly in the face of its support areas, becoming extremely predictable and gracious in nature, allowing bullish shareholders to profit. A stock that is exhibiting bearish symmetry will act perfectly in the face of resistance areas, constantly thwarting the efforts of bullish investors, only rewarding bears. There is also a middle ground where a stock or index becomes entirely unpredictable, eating any speculator in its path. The chart below will demonstrate bearish symmetry in action with respect to AAPL and explain the consequences of such behavior. Before getting to that, here is an example of positive or bullish symmetry with respect to AAPL telegraphing the move to 700 in August http://www.zenpenny.com/wp-content/uploads/2012/08/AAPL.gif Here is bearish symmetry in action, with the current...
THE ROAD MAP FOR 2013: SAME RULES, DIFFERENT YEAR
In mid-November with the Dow sitting around 12,600, I posted a study demonstrating why the Dow was poised to move to 13,500 by year end. The basis of this study was the movement of the Dow in and around its primary trajectory, pictured here. During the final summary of the Dow 13,500 study, I noted the following: 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. I believe there is a very strong possibility that the attachment of the market to this trajectory continues throughout 2013. If so, it gives investors an extremely accurate road map every step of the way. Here is an...
PORTFOLIO UPDATE: TRIMMING THE FUZZ
During the trading day, I tweeted the following: The last time I started the process of paring back my risk from a 100% invested position was on October 1st, 2012. At the time I had a very clear understanding of the risks the market faced. I made no qualms about expressing those fears to the chagrin of many readers who thought I was turning bearish way too early. Fast forward just 3 months and I'm caught in the middle of fuzzy patch. Today's technical formation (I call it The Ron Jeremy) did absolutely nothing to absolve the fuzz. Gigantic bars on each and every important index. Runaway moves. Crashing volatility. I want to embrace it completely...but, I can't. I want to hate it totally...I can't do that either. It really is a fuzzy point in the market for me, which is why I continue eyeing the 75% invested level as my comfort zone for the time being. I could be putting cash back to work as early as next week. One thing today's rally certainly accomplished is keeping the odds of my moving to anything below 75% invested rather slim for the remainder of January. As of the close today, following today's act of trimming, portfolios look like this: WMIH, SPNS, PXLW, UPIP and...
4 CHARTS THAT PAINT A FISCAL QUESTION MARK ON THE FOREHEAD OF THE MARKET
I was debating whether to even do a chart review this week given the unpredictability of the events surrounding the Fiscal Cliff. There come certain points, regardless of the analysis, when it is just useless due to overwhelming short-term events. I believe this is one of those points. Nevertheless, I have a streak of many uninterrupted weeks of providing a weekly chart review. I won't let Congress get in the way of that. This is an extremely confusing place that the market is currently camping in. Numerous crosscurrents abound, as I am about to show. I have started the process of reducing my net exposure a bit. In the process of moving down a 75% long position from 95% long. I have yet to take on a hedge, but may do so upon further weakness. Most likely in TZA. I'm airing on the side of caution to start the year. Well, that's if you want to call 75% long cautious. Matter of perspective, I suppose. click chart to...