USING THE PUT/CALL RATIO TO FORECAST 5% CORRECTIONS
It has been awhile since I looked into the put/call ratio to gauge whether sentiment has reached extreme levels. The reason I have turned my back on this indicator for most of the past 12 months is twofold. First, the technical work I was doing with respect to gauging tops and bottoms was working in such a harmonious manner that I didn't feel the need to muddle it up with noise. Second, WHEN you use any device to gauge price matters just as much as the device you are using. Allow me to amplify the second point by giving you a real life example of WHEN being of consequence. Take the man who decides to go hang out at a bar. If that man goes and takes a shot of tequila at 9 a.m. on a Wednesday, he will be seen as an irresponsible person with drinking problems. If that same man is to go the same bar 12 hours later at 9 p.m., takes his shot and laughs with some friends, he will be seen as a guy who just likes to party. When matters. Similarly, in the markets, WHEN you use an indicator can be the difference between being a floundering amateur or an upstanding professional. Certain indicators will work brilliantly under the right set of circumstances. They will also fail miserably under circumstances that aren't well suited to using that particular indicator. Just like a bad relationship, the key is knowing when to walk away. The put/call ratio may be at a point now that it can be useful again in the presence of numerous sentiment indicators that have been failing since January. There has been a consistent tendency to judge market participants as being excessively bullish, whether due to sentiment surveys, levels of margin debt or the run of the mill anecdotal evidence that pops up every few weeks. With the put/call ratio I like to use moving averages only. I also like to look at things like the length of time between the moving averages crossing over. The reason being that a short-term moving average crossing below a long-term moving average is a sign of a persistent shift in sentiment as opposed to anything temporary. The longer that shift remains in place, the more comfortable market participants are becoming with the foundation of the prevailing psychology. In the chart below you will see that the 20 day moving average of the total put/call ratio recently cross below the 100 day moving average. I go over what it means, along with what the absolute levels of sentiment according to the moving averages are telling us...
IS AN APRIL MARKET TOP AT ALL POSSIBLE?
There are a variety of market theories and philosophies that I have discussed over the past 26 months on this website. One of the aspects of market behavior I have discussed briefly in the past is the fact that the market will not ring a bell for investors at important tops. In other words, market tops are devoid of fundamental information that will allow investors to rationally or logically assess that a pullback is forthcoming. It is only after many months or sometimes years, that investors realize the deterioration that was taking place beneath the seemingly bullish picture that was being painted. Very few are aware to the point of being able to realize that the tickets they are buying are not worth the paper they are printed on. In 2013, there has been a consistent pattern of anticipation of the end to this rally. During January, the perceived excuse was uncertainty in the earnings picture. During February, we had a convincing seasonal pattern that pointed to an impending top, along with various technical confirmations. The ides of March have now come and gone without much of a hiccup in the persistent buying. Now we are coming up on April, which is earnings report season for most U.S. companies. If you are looking for a top in April, then there are two obvious fundamental scenarios that drive your conclusion: 1. Earnings will come in worse than expected, causing market participants to realize that they have driven equity prices too far forward OR 2. Earnings will be inline or better than expected, with the reaction being to sell on the news Scenario #1 is as brilliant and far reaching a bell sounding for investors as can be. Earnings come in surprisingly weak, allowing investors to have a logical set of fundamental data from which they can make seemingly logical decisions to cash in at record high prices. I don't see Big Bird walking around because this isn't Sesame Street. 1+1 does not equal 2 here. It equals 5 and sometimes 48. Just depends. To assume that the market is going to give investors a logical set of data for which to make simple assessments to sell is to assume that the pricing mechanism within the markets is friendly in nature. Scenario #2 has to be given a bit more credibility than the first. The only problem I have with this scenario is that participants remain obsessed with finding a top to this rally. A sell on the news scenario, while being a crude means of exercising unexpected mental anguish upon investors 15 years ago, is an outdated and obvious form of...
5 CHARTS THAT WILL REIGNITE YOUR LOVE AFFAIR WITH THE MARKETS DURING THE WEEK AHEAD
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TIMEFRAME DELIRIUM SYNDROME
Admittedly, I am a bit egotistical and somewhat arrogant regarding my views/philosophies with respect to investing and finance. I don't necessarily like to keep an open mind. Or rather, I should say, I don't like to have my mind opened by others for fear that it will cause me to deviate from a process of investment that has been 18 years in the making. Perhaps a better way to put it is that I appreciate the process of organic discovery coming as a result of the process I have developed. This appreciation for my own process leads me to ignore a majority of the views and opinions that swirl around me on a daily basis. It goes a step beyond that in the people who I choose to follow on Twitter. I will never follow an individual who has the potential to influence my opinion. Therefore, if I am following you it is because a) I like you but don't care about your market views or b) consider you an excellent source of data that has no consequence over my investment process or c) consider you a source of entertainment. This is one posting I couldn't ignore, however. A very good informational piece was posted today by Josh Brown @reformedbroker referencing an article about confusing your timeframe with that of others. It such an important concept that seems to be an area of confusion for so many. I would encourage you to look it over, giving it the appropriate consideration. As my process has evolved so has the need to look into longer time frames in order to accurately judge the path of a particular investment. The longer you move in terms of timeframe, the less noise you will have from what occurs on a daily basis, instead getting to the essence of price and volume behavior. There is always a tradeoff, however. The tradeoff with zooming out is that you have to be able to withstand increased risk. The price movement of a weekly or monthly chart spread out over a couple of years will encompass a price picture that is wide in its area of movement. Finding a means of balancing that risk while taking advantage of the clarity in price picture is perhaps the key to be able to using wider timeframes effectively. It is important to always keep an eye on the original timeframe you had for the investment to make sure you aren't deviating from it simply for the sake of an investment or trade gone wrong. As pointed out in the article, a common mistake is turning a trade into an investment simply because it...
SOME NOTES FROM A MARKET UNDESERVING OF THOUGHT
It may seem somewhat contradictory in nature than I am putting together a series of notes about a market that I consider undeserving of thought. What I intend to convey by labeling this as a market undeserving of thought is that in bull markets thinking has a tendency to do more harm than good. On a day to day basis it is becoming increasingly clear that market professionals especially have become prone to discounting this bull market, preferring to prepare for its demise rather than benefit from its prowess. I have been guilty of it. A vast majority of the pundits I read have been guilty, as well. It is indeed the market professional or experienced investor that tends to under-perform in markets of this nature, while those who perform less in the way of critical analysis tend to outperform. The reasons why should be obvious. One very simple word: Thought. The necessity to critically analyze is the hallmark of the market professional. When critical analysis is absent from the routine of the market professional he or she feels as if the job they have dedicated their professional life to isn't adequately being done. That feeling of inadequacy results in a continuous cycle of analysis. The problem is that analysis within strong market trends, be they bearish or bullish, inevitably will lead to premature decision making that counters the prevailing trend. Countering the prevailing trend leads to a loss of capital. A loss of capital leads to questioning and refining the analysis, when in reality what is in question is the foundational aspect of whether any analysis is necessary at all. So without further ado, allow me to present pieces of analysis that are completely counter to the prevailing trend: - The Nasdaq Composite is caught in between some key trajectory points. Very obvious congestion area. How it handles this point will be extremely important to the short to intermediate term bull trend. - The selloff in the Dow Transports is of some concern. I will have an updated chart this weekend. However, both the volume and nature of decline are short term negatives for the market. Transports, alongside financials have been the leaders of this bull run. Important that they continue smiling. - A question I keep asking myself is at what point does the weakness in Emerging Markets become a concern? Or are we at a point where Developed Markets are now seen as prudent with Emerging Markets much less so? - The Russell 2000 is pausing right on its generational trajectory. Here is a look at that trajectory from a chart I posted last month. -...
5 CHARTS THAT WILL HAVE YOU POUNDING YOUR CHEST WITH LUCIDITY IN THE WEEK AHEAD
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CYPRUS HILL
Leave it to the Cypriots. Futures are down roughly 15 on the S&P, as another Mediterranean country proves to the world that the only positive attribute they bring to the table is a healthy diet. I won't get into the macro details of what is occurring as that is not my forte. However, I will postulate a bit about my plans for reacting to a sudden move in the markets during the week ahead. I have maintained a 75% (25% cash) invested stance due squarely to my under-performance over the past 1.5 months. I don't necessarily like adding volatility when performance is lacking. It has been my experience that being conservative in the face of a lack of performance is a much more prudent stance than anything born out of aggression brought about by the zeal to play catch up. A gap down tomorrow is not an invitation to act in any capacity. It is squarely an invitation to observe closely as different averages run across support after the substantial run to begin 2013. There will be those who insist on buying the open in hopes that a blip down will remain just that...a blip. There are those who will react to the events, taking down exposure or possibly getting short, with the thought that this marks an intermediate term top. These are all hopeful gestures of analysis that take the form of buys and sells in the marketplace. I can't think of a time in nearly 20 years of playing this game that I haven't looked back on a macro inspired gap and wished I would have reacted FASTER. It has nearly always been the case that observing would have paid better dividends than simply reacting. I have nothing to do tomorrow but to observe. Just another Cyprus Hill...
PORTFOLIO UPDATE: A NEW POSITION
During the trading day Friday, I tweeted the following: JMBA position was taken in the 2.90 range. A small position, meaning that it represents less than 10% of the overall portfolios. I trimmed away from a few positions in order to keep overall allocation at 75%, with 25% in cash. JMBA is a position that I would be very comfortable making into a large allocation, meaning between 20-25 percent of the overall portfolios over...
JMBA: THE JUICE IS LOOSE
Position taken in the $2.90 range during the week of March 11th, 2013 An Industry Prepped For Growth There is nothing that confirms an emerging trend like a market leader taking a position in a niche marketplace. I begin this report with the significance of Starbucks purchasing juice company Evolution Fresh in November of 2011. It can certainly be argued that Starbucks is at the forefront of understanding the tastes of consumers as it relates to their beverage preferences. The acquisition of Evolution further legitimizes the emerging trend of an increasingly health conscious consumer searching for options that sustain wellness. A cultural shift towards seeking out products of a higher quality to enhance health. It is not just Starbucks noticing the upside potential in this trend towards health conscious consumers demanding healthy beverages, Campbell Soup purchased Bolthouse Farms, a seller of produce and premium juices in 2012 for $1.55 billion. Market leaders in the food and beverage industry are essentially telegraphing what their research tells of consumer habits going forward. This is a dynamic among consumers that has been gaining momentum over the past 10-15 years. Witness the growth of Whole Foods (aptly referred to as Whole Paychecks for the premium they charge for "healthy"), a company that has revolutionized grocery offerings and presentation. The share price has increased 650% since 2000. Even more traditional grocers are taking notice, having entire sections dedicated to "organic" and "fresh" offerings. The consumer has an increasing appetite for health conscious choices that marks a significant change in consumption habits. This from American Express Market Briefing from 2012: http://www.technomic.com/_files/Newsletters/Marketbrief/marketbrief_6-12.pdf Juice—once seen as just a specialty or breakfast beverage—has emerged as one of the biggest menu trends in the restaurant industry. The interest in fresh fruit juices and juice blends is in line with the new health consciousness, in particular the emphasis on “5 a Day” consumption of vitamin-packed fruits and vegetables. But we’re also seeing consumer boredom with soft drinks; consumption, while quite high, has been more or less flat for some time. Consumers are increasingly turning to noncarbonated alternatives, from flavored waters to iced teas to juices. Bottom Line: With the drives toward both healthful eating and novel beverages, consumption of fresh juices in restaurants is up significantly—and has plenty of room to grow further, fueled by the potentially vast variety of juices, blends and additions that can be offered. The quality and variety signaled by juice offerings make them an attractive point of differentiation for concepts of many types. This continuing trend towards collective consciousness of the products consumers choose to ingest on a daily basis will only grow as individuals become better informed of the options available to them. A...