TWO IMPORTANT AVERAGES ARE SUBTLY DELIVERING A BULLISH SIGNAL
It's the subtle indications in the market that give investors the greatest advantages. Otherwise, you are basically knee deep in information that everybody else is keying off of in an attempt to gain an edge that often times doesn't exist. The latest subtle technical clue that the market is delivering to those who choose to listen is in two important leading averages - SOX (Semiconductor Index) & RUT (Russell 2000). When both of these averages are working together to provide leadership, magical bull runs can and often times do develop. What is important to understand in this circumstance is that this may be the beginning of their leadership exerting itself, with several more months of a carving out process taking place before the markets begin their run higher. All signs continue to point to late Q3 or Q4 as the point when the market gains its legs back. For the time being, this is the type of foundation bulls want to continue to build throughout the summer trading months: (click chart to...
WE ARE EXPERIENCING MANIPULATION OF MARKET PARTICIPANTS AT ITS GRANDEST
There is a certain repugnance attached to the current market that is being expressed in price action almost perfectly. Contrary to popular wisdom, the act of being disgusted with the financial markets doesn't necessarily have to be expressed through the outright liquidation of a stock portfolio. It can arguably be better expressed through frustrating price action that leaves both sides of the market furious at their inability to cope with current conditions. Welcome to the market of 2016. This dynamic is nowhere better expressed than a look at the Nasdaq Composite, which is a symphony of degradation in psychology expressed with red and green bars. There is no glory in battling such a colossal miscreation, only pain and regret. Fortunately, it seems that market participants have grasped this concept as the long-term put/call ratio is nearing points of fear only seen during severe economic contagion of one form or another in the past. What is important to realize is that given both of the dynamics expressed above it will be impossible for market participants to correctly surmise when it is appropriate to become aggressively bullish again and stick to that position. The psychology of defeat expressed through complete frustration as revealed in the current price action will be looking to sell rallies just at the time they should be bought. When it comes to the essence of what the markets are attempting to accomplish at this juncture this may be it. Positioning participants to consistently make the wrong move (sell stocks) during what will be a period of time when making that move will prove extremely costly due to the persistence of the uptrend that forms after this prolonged consolidation for the major market averages. It is impossible to pinpoint when that move up will begin. I don't think it will be anytime between now and September. Sometime in Q4, possibly Q1 of 2017. In the meantime, there is more work to do in manipulating those easily manipulated so that the supply exists on the way up to satisfy the voracious appetite for stocks that is sure to...
APRIL CLIENT LETTER: REVERSIONS; TEPID BULLS ABOUND; HEDGEAPOOLZA
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Reversions In stepping back and looking closely at the current portfolio during what has been a disappointing 2016 to date, I am reminded of a method of testing conviction in each portfolio holding as described by Lee Ainslie of Maverick Capital: When Mr. Ainslie reviews the overall plan, he is thinking about the size of every position. Mr. Robertson [for whom Mr. Ainslie worked in the early 1990s] taught him to test his conviction by asking himself if the stock is a buy or a sell. A hold isn't an option. This is how I've come to think of it over the years: Either this security deserves incremental capital at the current price point or it doesn't — in which case, let's sell it and put the money to work in a security that deserves that incremental capital," Mr. Ainslie said. At T11 Capital, I very much utilize a similar methodology in portfolio decisions. If at any point an investment gets to the point where I wouldn't consider adding to the position, then the investment should be sold. This has been one of the components behind our timely exit in investments like CIDM close to $3 per share, IMH near $21 and many others over the years, that have declined significantly following our exit. Not to say this methodology is foolproof (nothing is, of course) by any means. We have also exited SPNS near $7, it is now at $12. I decided to let go of MITL near $3 years ago, it is now trading at $7, after going as high as $12. Overall, however, this level of thinking with respect to allocation decisions rewards conviction brought about by depth in research. It forces an investor to constantly evaluate whether a holding is exhibiting the same positive attributes that caused an allocation in the first place, mitigating the numerous gray areas that often times end up being a weak or compromised thesis disguised as indecision. In closely reviewing our current portfolio positioning on an everyday basis, there isn't a position in our portfolio with the exception of our investment in the illiquid Lehman Capital Trust shares, that I wouldn't consider a buy at current levels. We are in possession of extreme value within a market that is playing a game of reversion to the mean of my particular method of investment. A situation, by the way, that is a natural phenomenon of investing, as well as being a component in the demise of many talented investors who feel the need to...
THE INTERNAL CONFLICTS FOR THE MARKET THAT LIE AHEAD
This is one of the more difficult spots of the bull market to date given the various crosscurrents that exist. Let's look very logically and unemotionally at what has happened to date: We started the year by having one of the worst first quarters on record midway through, only to bounce perfectly off of a key support area as pessimism was at historic extremes. We have seen a substantial bounce take place that has reconfigured sentiment, although bearish sentiment (or perhaps more aptly an unwillingness to commit to the market on the long side) is still pervasive among investors. Nevertheless, the market paid attention to a very minor resistance point at S&P 500 2100 which has resulted in a very standard pull back over the past couple of weeks. So we're basically stuck between a major area of support down around 1880 for the S&P and a minor area of resistance around 2100. This range-bound action is occurring just as technology is disassociating itself from any general trend in the market with a significant bias to the downside. Other sectors continue to show relative strength, but with the weight of a bearish technology sector the market will inevitably become sloppy. This becomes even more the case during what is going to be an illiquid summer trading season as hedge funds continue to face redemption requests in the midst of general confusion among managers while retail investors remain perpetually absent. Add to that general bearish sentiment among a majority of investors marked by deep skepticism and incessant fear within what is sure to be the Barnum and Bailey's of presidential elections and you have the formula for a stock market that only wants to hurt you. This is not a statement of bearish or bullish significance it's a statement of malicious intent against both sides of the trade. A sideways market that is running 100 miles per hour to nowhere while wearing flip flops, skinny jeans and some stunner shades. In other words, a market that makes no...
AVOID THE SLOSH
The sloshing around of the S&P 500, led by a gallantly mediocre tech sector, shouldn't come as a surprise to investors after the run we have had since the recent lows. This is simply a function of the markets reacting to a convenient stopping point to assess what comes next. click chart to enlarge There is a distinct possibility that technology will underperform from this point into late summer, which sets the stage for continued sloppy behavior for the various indices. Too many tech names have either hit important resistance points and are now reversing or are in no man's land in terms of price. Given some type of massive risk on movement by asset managers the sector will likely be thin on the bid side. It is by no means a death knell for the market as there should be continued rolling movement with a general upside bias for the S&P 500, led by financials. If there was ever a summer to take off in order to avoid the psychosis inducing gaze of the market during a time when it will be searching for victims of all stripes, it will be June-September of 2016. Below is a musical reminder of the best course moving forward to be played as frequently as necessary to avoid monetary calamity....
HEDGE FUND DYSTOPIA
There hasn't been a period of time since 2000 when the death of hedge funds hasn't been spoken about as being imminent and widespread. Any type of pull back or market calamity is cited as the latest reason for their demise. Just like any other profession based on performance if you don't perform you don't deserve to be in the business. If a wide receiver in the NFL suddenly starts catching only 30% of the balls thrown to him then he will no longer be employable in the NFL. It doesn't mean that the wide receiver position is dead. Elegantly bringing me to my next point. The hedge fund industry has become overwrought with sophisticated salesman in possession of advanced degrees who neither have a passion for the business or the aptitude to be in it. Instead they are in possession of above-average levels of salesmanship and a network of wealthy individuals who become smitten. Their strategy is one that relies on follow the leader in what has become a copycat profession in the midst of a culture that is obsessed with closet indexing. The only passion is for collecting fees without regard for developing real skills or taking well thought-out steps to improve performance. Take for instance the most recent run of the herd at beaten down oil and gas stocks. In what is purely a reversion to the mean trade, hedge funds are playing a game of musical chairs with any energy stock they can get their hands on. There is nothing repeatable about the process of buying energy stocks either now or two months ago. In other words if you ask the average hedge fund manager that has bought into energy over the last couple months to repeat the process in another asset class at some point down the road it will be impossible to do so because there is no process behind it other than piling into momentum. Until investors in hedge funds are able to differentiate real managers with a distinctive investment process from professional salesman that are only in possession of the gift of gab, the cycle of scorned investors and negative publicity will continue....
TURNING SIDEWAYS
Whereas the market environment of January and February was screaming market bottom as nearly every market pundit was manipulated into thinking we were in a bear market, the market environment of today is much different. There is a general sense of awkward suspicion occupying the hearts and souls of investors that need to create returns, yet are afraid to commit for fear of something nefarious in the offing. The result of this distrust is a cloud of neutrality that is beginning to become apparent in the price action of both individual issues and major averages. There is very little correspondence between one asset class and another. For example, while financials looks like they might be getting ready to outperform, technology looks like it is getting ready to move into a general malaise. There isn't much an investor should do in an attempt to cope within such a market environment. Being overactive will result in a grind lower for your equity curve that will create an avalanche of frustration culminating in something much worse down the road. Being underexposed to equities comes with its own set of hazards as this is default position of a majority of investors. The same majority that hated stocks in 2009, loved real estate in 2007 and didn't care what price they paid for Garden.com in 2000. Now they have simply thrown their hands up in disgust, hoarding cash for fear of any asset class that has volatility exceeding that of a certificate of deposit at the local credit union. The best course of action to take then may be to do as little as possible until a market turned sideways reveals its true intentions. There remain pockets of value all over the place. However, tepid market participants have been slower than usual in making the commitment necessary to allocate any substantial capital into these situations. While that may be cause for some investors to pull the ripcord, it will turn out to be a poor decision. When markets get pricing of an asset incorrect, they will make the correction in time, as evidence of the error mounts. In smaller, less liquid names, the correction is often made in a matter of days, as opposed to months or years. You literally have an entire year (sometimes multiple years) worth of gains that takes place in a single week. In other words, the smaller you go in terms of market cap, the more private equity like the investment becomes as the mark to market takes place at greater intervals. While the market may be turning sideways, decisions made by investors should remain constant, realizing that the...