What follows are the topics covered in this weekend's note to subscribers. To become a client of Zenolytics Turning Points or to learn more click here.
The excerpt from last weekend's note is available here.
In this weekend's 15 page note we discuss:
- Potential for air pockets beneath the market during August
- What FANG names are telling us about the market
- What software names are telling us about the market
- Important signals conveyed by gold and silver late in the week
- Financial names
- A resurgence for "real economy" names in the offing?
- A review of what may be in store for Zillow after we took profits on Friday.
Market Update
Coming into August, I had this as a month that had a high probability of seeing some act of barbarianism towards what has become a significant herd of rampaging bulls. The key to outperforming during a month when the probability of such an event exists is to do whatever possible to avoid the downside move, looking for signals within the market of shifts in capital that nearly always precede market calamities of every amplitude.
Of course, our risk in avoidance is missing out on greater gains in the market by being in a cash position, as we are now. However, performance must also be considered when making these decisions. After our Zillow trade, T11 portfolios are already up a double digit percentage for the month, allowing for some measure of defense to be taken without fear of underperforming an S&P that is up 2.45% month to date.
This isn't the first time we have taken a sudden evasive defensive maneuver. In fact, we have taken similar measures, moving to a cash position, during June and July. We had the added benefit during those months of being allowed to take this type of defensive maneuver, removing us from harms way, while still greatly outperforming the market. I do realize that in the future we may not get so lucky, with the market moving away from us more quickly than we can react. This is the obvious risk of making such a decision.
The reason to take such defensive measures in a rather sudden fashion has to do with primarily technical signals that I will go over here shortly. There are broader reasons, however, to take on such measures as a trend matures.
As a bullish trend matures, participation in the trend increases. That participation comes from two sides. The first is those who have grown optimistic about the market, putting capital to work. The second comes from those who have grown less pessimistic about the market, covering their short positions. In both the first and second instances of buying, there is also motivation coming from both greed and fear, further exacerbating the buying pressure.
What happens when both optimistic bulls and less pessimistic bears come together to push the markets up is that the support mechanism for the markets get hollowed out to a certain extent. This hollowing effect acts as an air pocket beneath the market, as there are less buyers who have cash to put to work and less buyers who have short positions to cover.
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