SPRINTING SCARED
As the persistence of the current bounce becomes apparent, the trembling, crooked fingers of the average asset manager have become increasingly disfigured rendering them unable to pick up their saltine crackers and grape juice as they ponder ways in which to allocate their cash in a comfortable manner. And that right there is the problem or perhaps, the solution, to the current perception of this recent rally. The comfort level in buying this run up on some of the lightest volume we have seen in years is simply not there. It doesn't exist. Leaving asset allocators no choice but to stew in their own rigidity as they await what may never come. According to the BofA Merrill Lynch fund manager survey released some weeks ago, fund manager cash levels are at two year highs. Nothing Earth shattering in an overly-bearish tone, but still relevant in judging the perception of the current market. When institutions increase cash levels it is because they either 1) believe that equities will become cheaper at some point down the road, allowing them to buy back in over several months OR 2) are unsure in their belief of the equity markets, rendering them unable to make any decisions of consequence as to how assets should be allocated. Cash then becomes the safest bet until the market convinces them otherwise. In both cases, institutional fund managers will have their hands forced by a market that presses to the upside. This is because institutions do not have the luxury of sitting out rallies in their benchmark based on simple theory. Not after what has transpired in terms of under-performance for the past 5 years paired with an increasing array of options for investors to gain exposure to equities without the need for an asset manager that has under-performed greatly. In the current circumstance, you can see a market that is intentionally running away from those who are attempting to coax it back into a position that would provide the comfort needed to gain exposure. Each headline that passes with news of an all-time record high in the S&P 500 is similar to a jab to the gut of the fund manager who is neither comfortable, competent nor desirous of exposure to a creature he frankly does not understand. As averages that have been abhorred as under-performers and dead money in 2014, such as small-caps and growth continue their surge, more pressure will build on those who are under-invested to catch up. Eventually leading to the catch up trade that typically marks short to intermediate term highs in the market. During the entirety of this exercise in articulate buffoonery,...
THE CURRENT STATE OF THE MARKETS: WHAT HAPPENS ON WALL STREET STAYS ON WALL STREET
In the May 11th edition of "Current State," the conclusion after various points of analysis was that the markets were poised to break higher after digesting the breakdown in key growth names in a graceful and elegant manner. With last week's close at record highs for the S&P 500, the market is slowly revealing its hand to a mostly unconvinced constituency that is more concerned with harboring psychological scars of the past than profiting aptly from the present embodiment of a bull market. This fact is revealed in both the volume and tedious nature of the price action. There is by no means a rush for entry back into the markets by those who feel that equities contain a disproportionate degree of reward from this point forward. In fact, it has been a hallmark of the current bull market to tiptoe to the upside in a manner that has caused concern since the very beginnings of this bull market in 2009. The tiptoeing nature of this bull market continues to cause confusion for investors who have been brought up in the school of violent moves to the upside coming about on above average volume. A trait of the markets that was left behind in the 90s alongside Pets.com, CMGI and Iomega. The modern day secular bull market is built on such a wide array of available options for equity exposure that it would be foolish to think that volume would be able to be interpreted as it was in the past. Additionally, there is a chronic absence of conviction among market participants that shows up in both volume and price action. Let's start by looking at a weekly chart of the Dow, which is setting up as powerful a pattern below a critical area of resistance as can be found: What is important to note about the weekly Dow chart above are two things in particular: 1. The extremely tight nature of the consolidation above the previous short-term highs from the middle of last year. 2. The extremely tight nature of the consolidation below the extremely important generational trajectory that has its origins at the 99-00 bull market high. The fact that the Dow has chosen to put together one of its tightest shows of consolidation in recent memory below a generational trajectory is extremely bullish. It tells of a market that may actually run from here further than any of us expect. Moving onto technology next. According to the Nasdaq Composite, the downtrend that has plagued the market since March is now officially over. The obvious target for the Nasdaq is the old highs right around 4370. The...
SIDEWAYS
For all the posturing, conjuring and theater that the markets make available to viewers on a continual basis, this past week gave spectators absolutely nothing. The markets went up, making those of us predisposed to bullish thinking assume the jovial position. The markets went down, making those of us predisposed to bearish thinking assume the emboldened position. The S&P ended the week down 1. Not 1 percent, but rather 1 point. It seems we have entered a phase of the market where we are in a sideways range, within a sideways range that is further within a sideways range. We are sideways on a yearly basis, as 2014 has been more or less flat. We are sideways on a quarterly basis, as Q2 has been more or less an exercise in accomplishing nothing for the markets except a wide variety of predictions by its participants. We are sideways on a weekly basis, as previously discussed. We are sideways on a daily basis. Even the intraday action was sideways, as the markets went up a bit, down a bit and ended up going nowhere. This type of indecision typically gives way, in a rather sudden fashion, to a new short to intermediate term trend. In my case, I believe that trend will be to the upside as discussed last week. The sideways nature of trading changes nothing in the hearts and minds of investors. If anything, it makes them more resolute in their prevailing beliefs. The wonderful part of sideways price movement is that you can assign any variety of indicators to the movement and determine for yourself whether it is bullish or bearish. In other words, a sideways market puts most popular means of determining a bullish or bearish trend in a compromised position. Due to the fact that they are compromised, it is incumbent to the operator of the indicators, whether fundamental or technical, to exercise an increasing amount of interpretive analysis that typically falls along the line of the prevailing bias of the operator. Sideways markets don't change minds, they just create a further hardening of them that will only give way when the dam breaks. I will post some interpretive analysis of a bullish bias...
THE CURRENT STATE OF THE MARKETS: WHAT IS OBVIOUS IS OBVIOUSLY WRONG
In looking over the situation facing investors, at present, it seems we are all faced with a series of relatively simple judgments to make in order to assess the portfolio allocation that would create the greatest expected value going forward. The decisions are as follows: 1. Does the fact that the S&P 500 is pinned to its all-time highs with steadily decreasing volatility present a bullish or bearish phenomenon? 2. Does the fact that the Dow Jones Industrials and Transports are pinned to all-time highs with steadily decreasing volatility present a bullish or bearish phenomenon? 3. Are both of the above mentioned questions negated entirely by the fact that the Nasdaq and Russell have been demonstrating the exact opposite behavior? In other words, both the Russell and Nasdaq have been declining with volatility attached to the move. The third question is the most important as it seems to garnering the most attention. More importantly, it is creating the most fear and emotion among market participants. Before we get to the indices that have broken down, here is a look at the S&P 500 on a weekly basis. The most important aspect of the current price action is the fact that volatility is so well contained along a key trajectory (in blue) and directly below another key trajectory. The behavior strongly suggests that the S&P is eyeing the trajectory (in red) sitting around 1950. A move of some 3% higher from current levels. In a very simple sense, the S&P 500 is telling us what to think. In this case, it is telling us that the issues of the Nasdaq and Russell are of no concern. It is the choice of market participants to believe that there are shadows lurking behind every corner. Volatility demons with jagged teeth looking to rip into the flesh of investors. That is an issue of investor imagination, rather than reality. The answer according to the S&P 500 is very clear if you choose to accept it: The markets are preparing to move higher. Let's look to see if the Dow agrees with the S&P 500. This is a look at the Dow on a monthly basis. What you see is an incredibly bullish picture the Dow is painting when you zoom out with a monthly view. Especially given the fact that it is occurring below a key trajectory that has acted as resistance for the 2000 top and the 2007 top. At present, the Dow is simply consolidating along this trajectory with a series of tighter monthly ranges. This is a continuation pattern in the direction of the primary trend. And it...
A DEEPER LOOK INTO THE COMPARISON BETWEEN THE MARKET OF 2014 AND 1996
Comparisons to the bull market of the 90s can certainly act as a point of guidance for the current market. One analog that been getting increased attention is the comparison between 2014 and 1996. Here is a look at both markets from a price perspective: If you look beyond pure price movement and the similarities in terms of the number of years we have been rallying at present compared to 1996 etc., you will notice one striking characteristic in the internal dynamics with 1996 vs. 2014. In 1996, before the internet really became a buzzword, with companies like YHOO and AMZN either just coming to market or being pre-IPO, the semiconductor stocks were the go to momentum plays. They powered the Windows PCs that you would run on your desktop that would get you onto AOL or Earthlink. Companies like MU, LRCX, LSI and AMAT ran the show back then. They were technology. They were momentum. When you wanted returns in excess of the benchmarks you went into these names. Much like the FB, YELP and TSLA of our current market. Something peculiar began to happen to the semiconductor names around late 1995, really gathering momentum by the middle of 1996. They completely ran out of steam,with a majority of them suffering declines far greater than 50% from their 1995 peaks. These were stocks that had appreciated hundreds, even thousands of percent the previous few years. Investors were all in, not realizing that serpents thick, scaly tail was being wound up to knock them head first into the deep ravine below. How much had semiconductor names made investors? LSI Jan 1993 $2.69 per share October 1995 $29 per share MU Jan 1993 $1.89 per share October 1995 $40 per share AMAT Jan 1993 $1.05 per share October 1995 $6.39 per share INTC Jan 1993 $2.72 per share October 1995 $7.52 per share Investors were happy. Too happy, in fact. The stocks stalled in October and began declining in earning in early 1996. By August of 1996 the declines in the stocks of the companies mentioned above were as follows: LSI -66% MU -75% AMAT -53% INTC +23% one of the few exceptions of the group For a majority of the time that these growth driven leaders of the market declined the S&P 500 did nothing, as you can see above. The decline in semis only interrupted the upside momentum in the market by stalling the uptrend, creating a frustrating, sideways market....
THE CURRENT STATE OF THE MARKETS: MACRO IS DEAD, GROWTH IS ALIVE AND IMAGINATIONS ARE WARPED
Macro is dead. Paul Tudor Jones, perhaps one of the most famous macro investors of our time, confirmed this fact at today's Ira Sohn conference with a presentation titled: “Manic depressive trading in a volatility-compressed world.” He did say during his presentation that, “Macro trading is about as difficult as I’ve ever seen it in my career." The reality of coordinated, global central bank intervention has taken its toll on all the key components that make up the bread and butter of the large macro investors. We are increasingly living in a micro world, where focused themes in technology and financial innovation will drive extraordinary capital gains for investors. At this moment, the markets are in a digestive phase that has seen key momentum or growth based names suffer extraordinary punishment in the past couple months. All the meanwhile, the general market (SPX, DJIA) has held up remarkably well, being poised for new all time highs in the days and weeks ahead. The strength being shown by the general market averages while technology, biotech and to a certain degree, financials have all experienced extraordinary losses should be seen a positive sign by investors. It is by no means a precursor to any type of financial cataclysm in the form of evaporating stock prices in the months ahead, as you have been led to believe by the gallivanting pundits that occupy media of all type. It is of key importance to have perspective during periods of time where confusion reigns supreme. Perspective in the case of momentum driven names comes in the form of zooming out a bit and looking at their performance thus far in 2014: FB +12% GOOG -6% NFLX -6% TSLA +44% YELP -13% ZNGA +1% To those claiming that growth has imploded, I ask if they would like a wax with their brain wash? This is not an implosion but normal market behavior during a secular bull. Those who regrettably and perhaps, naively chased these names up during Q1 are being taught a very basic lesson of bull markets: Chasing momentum is a punishing sport. Further, those who are complaining of the punishing circumstances surrounding growth names in 2014 have simply arrived at the masquerade ball late and without the proper costume. You can see in the chart of TSLA below that it has just today pierced a short-term trajectory to the upside. It should also be noted that the recent multi-month sell-off has been occurring on consistently diminishing volume. A very standard pullback by any stretch. I would also put a tremendous amount of weight in the simple fact that TSLA is one of the best performers in...
THE STRATEGY OF NOT CARING
Much like anything else in finance, every tool for investment whether fundamental, technical or emotional has its uses and a season for that use. Fear is not always a terrible trait. It could have saved investors greatly in 2007 - 2008. Greed is not terrible either. I know many greedy investors who have done extremely well in the markets. There are no Ten Commandments for success in finance. It makes for a good title to sell books to the hopeful (another trait that can be used sparingly), but the fact of the matter is that the fluidity that is investing will never allow single point of fundamental, technical or emotional success to have an uninterrupted, peaceful existence. Caring is an endearing trait that is celebrated for good reason. That is perhaps why so many individuals will bring the act of caring into perpetuity with them to the realm of investing. It simply doesn't transfer. Investing when approached properly is a simple game of making decisions that have a positive expected value over the long-term. The only way to gain knowledge as to what constitutes positive expected value is through experience. Those who are consistently successful in the markets after 10, 15 or 20 years, have naturally found a path towards decisions that have a positive expected value, whether they realize it or not. Most will chalk it up to dozens of different skills they have gathered. But the essence of what they are doing is good decision making on a consistent basis. The problem with consistently caring, as so many individuals believe it is their duty to do, is that it leads to various peripheral evils that will eventually all gather together like a Chinese sandstorm, collapsing an investors ability to make decisions that have a positive expected value. Those peripheral evils primarily have to do with over-thinking situations that require no thinking at all. When you strip away everything and I mean EVERYTHING from the markets, the situations that an investor faces become abundantly clear. What investors so often fail to realize is that 95% of the price movement that is witnessed on a yearly basis does not require judgement of any sort. It simply IS. This means that out of the 250 or so trading days that we experience each year only 12 of those days (keep in mind, I am talking about investors, not traders here) require our effort or judgement. The rest of time the markets are simply filling space through random movements that are meant for those who care in perpetuity, which is the vast majority. After all, entire companies have been built on the...
APRIL PERFORMANCE SUMMARY AND LOOKING AHEAD TO MAY
*This is my monthly letter to investors summarizing the month. The full PDF version of the summary, including managed account performance data as well as a few added components is only available via email. Return data will no longer be published as a part of the summary. If you would like to be added to the monthly email list, please contact me at mail@t11capital.com Download (PDF,...