AT WHAT POINT DO YOU KNOW YOU ARE WRONG?
There isn't a position I take without being able to answer this question. It is a question that should be at the core of any investment or trade in any portfolio, regardless of experience or pedigree. Regardless of whether the position is a hedge, outright long, short or investment that you plan on holding for a decade. There is always a point when the original thesis that caused the investment to be taken will get blown out of the water. It is the job of every individual who gives a damn about wealth preservation to know that exact point. The mistake made by so many investors who choose to follow the fundamental creed without regard to price is that they can't give you an answer to this core question. The reason is that price leads fundamentals. By the time the reason for the decline in price morphs into tangible fundamental evidence of a problem, the stock has declined way past any reasonable point. It is the reason why few value investors make it through tried and true bear markets. The philosophy of buying into price declines that chew through every point of technical support, but are justified by valuation ratios that placate any concerns will eventually lead to fatal ruin. An anomalous period will come along that carries prices through concrete floors of value once thought impenetrable, burying investors under a suffocating ash of fundamental data that fails to quantify downside. It is the reason why you see that I have actual losses posted in well researched positions that have failed to move as expected. The opportunity cost and monetary cost of sticking with positions that move contrary to expectations is simply too great. The exact same philosophy applies to hedges that are initiated in the portfolios, similar to the hedge that was taken in TZA this past week. I know exactly what the market should do here in order for my hedge to be validated. If the market behaves contrary to my expectations, I will assume that my understanding of the situation is not as clear as I thought. If my understanding of any situation lacks clarity, I then lack reason to risk capital in that position. Here is what the market should do over the next 1-2 weeks according to my work: click chart to...
THE ROTTEN COMBINATION OF BIKINI CLAD BULLS AND GRUMPY OLD MEN
In an effort to keep readers apprised of the latest in a series of thoughts that would be impossible for me to categorize if it wasn't for this website, I would like to present a long-term look at the S&P 500. This will clarify exactly why I believe the resistance level we are facing (in the form of an important trajectory) is significant within the overall bull trend. Furthermore, we are banging heads with this resistance area as busloads of bikini clad bulls are taking great comfort in what seems to be the 2013 version of The Endless Summer. Unfortunately, this is not 1966 and there are no surfboards or exotic locales in the stock market. There are only grey buildings occupied by grumpy old men that want nothing more than to see you walking around with rabbit ears, a tattered blanket and a cup that jingles. Your money becomes their money the moment you sink your teeth into the belief that what is being said by the majority cannot be wrong. If we were rising against a wall of great worry as we were just two months ago when I was touting the benefits of bullish perfection I wouldn't be nearly as depressing a host. There is, however, reason to become defensive. Not bearish. Defensive. My personal version of defense started this past week with the initiation of a medium sized hedge. Here is a long-term look at the resistance level the S&P 500 is sitting on presently: click chart to...
5 CHARTS THAT WILL LEAVE YOU IN PEACE AND NOT IN PIECES DURING THE WEEK AHEAD
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FACEBOOK THE LOVER
AAPL was snarling, hissing and vomiting on investors in the days and weeks leading up to its earnings report. Much like the little girl in The Exorcist, AAPL did everything possible to warn those who chose to listen that it was possessed by a bearish spirit that was intent on harming any investors who came within spitting distance of the stock. From an angel to a demon in a matter of months. On the opposite end of the spectrum is FB. Once the poster child for maleficence, FB is one of the better performers in technology over the past few months. As the company prepares to announce earnings in the week ahead, the stock is lovingly starring investors in the eyes and blowing kisses in the wind. In other words, the setup from a price action perspective is outstanding in terms of structure, quality and participation. There are rare instances where the market gets things wrong. A stock will climb to high end of its range, only to be blindsided by an earnings report that floors investors. I don't think FB is due for such an anomalous event in the week ahead. The earnings should confirm the loving and rosy picture that price has been painting over the past few months. Here's a look at the upside possibility as we head into earnings this...
A COMPLETELY IRRATIONAL (OR IS IT?) LOOK AT THE DOWNSIDE IN AAPL LONG-TERM
As I sit here tonight over a bowl of frozen yogurt pondering an investment world where AAPL is devoid of any role other than frustrating investors through under-performance, I can't help but wonder exactly how bad this will get before it gets better? The answer doesn't lie in the fundamentals of AAPL. Truth be told, those who have relied on the various ratios of value to gauge the stock have been struck with a plague of epic failure. Fundamental valuation has been quoted the entire way down from the highs in a HD quality display of the failings of fundamentals in dynamic situations where overexposure to an asset causes emotion led price movement. The market owes none of those who step onto its playing field a single sliver of rationality. Fundamental ratios of value assume that it does. That is exactly why fundamentals should be used as a complimentary tool and not an absolute measure of whether to buy or sell. This fact seems to be forgotten far too often. A chronic mental disease of the investor class. The CORRECT study of price offers the most impressive results for the fluidity that AAPL brings with it. Without quoting a single ratio of valuation, let us look at what price says is the future of AAPL on the downside, as well as the possible duration of this bear market in the stock. The chart below is a QUARTERLY chart of AAPL. That means every bar you see represents an entire quarter of trading. The chart goes all the way back to 1985 so that the trajectories that are guiding AAPL can be accurately interpreted. This look is the best way to ascertain (1) the depth of this pullback (2) the length of time it will take. Here are the results of that look...
4 CHARTS THAT PAINT A PICTURE OF RISK/REWARD THAT IS SLOWLY TURNING UPSIDE DOWN
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HERE IS WHAT TO EXPECT ON THE DOWNSIDE FROM THE MARKET OVER THE NEXT FEW MONTHS
In order to have an accurate assessment of the future, it is important to look back at where we have been. More importantly, this look back can help in understanding the foundation of this current analysis. So let's get started: - On October 14th, after waving a caution flag since late September, I posted a 1-2 month downside target for the Dow in the 12,300 range. - On November 16th, the Dow hit what would be its low for the rest of 2012 at 12,471. - On November 17th, I posted an upside target for the Dow by year end of 13,500. - While year end was clogged by a Congressional circus, on January 2nd the Dow closed at 13,412. The market finds itself sitting in a familiar position, once again. That position being the noticeable difficulty the Dow in particular has had with the generational trajectory points that have acted as upside resistance for a number of years now. The only question the astute observer should have then is the following: Is the market in a position to overcome this resistance or are we due for another case of fear induced declines off these trajectory points? Although I am long-term bullish and believe 2013 will see the Dow end at record highs above 14,000, those record highs won't be made during the first half of the year as the market is currently suggesting. To achieve such highs early in the year would require an acceleration far above the generational trajectory points. This is something that market simply isn't positioned for at this stage. The market continues to be in a low volatility uptrend that will hug these trajectory points for a number of years to come. Very similar, in fact, to the 1991-1995. Over the next several months this reality sets the market up for limited upside from current levels. The "hugging" effect will more than likely see a rolling top take place into March, with an ultimate low for the Dow around 12,800 by the time all is said and done. The upside from these levels over the intermediate term (based on the Dow) is roughly 100 points. My allocation is completely mechanical in nature so I won't be taking down my 85% long exposure on Tuesday morning as a result of this assessment. I will, however, likely be keeping a lid on long exposure at 85%. Once my trend indicators begin turning, assuming I correct, I will then begin lowering net exposure. In the meantime, good stock picking will continue to outperform as we begin forming a rolling top over the next few months. Here is an...
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...