THE COMPARISONS TO 1995 ARE ACCURATE BECAUSE THIS IS 1995
Business Insider published an article today titled "The Stock Market Is About To Do Something It Hasn't Done Since 1995" In the article it points out the following: "All 10 sectors of the S&P have posted double-digit gains year-to-date, a rare market trait considering that it has been nearly 20 years since all 10 sectors of the S&P have registered annual gains of 10% or more," he added. "Indeed, the last and only time it happened was in 1995, following the equity blood bath in 1994, when the Federal Reserve brutally raised the Fed Funds rate six times." I bring your attention to this piece of research because the faded memory of 1995 should be retuned and brought to the forefront of the investor consciousness for the remainder of 2013. A little over one month ago I posted a study comparing the Dow of 1995 to today's market. We'll get to the technical points in minute. Investor psychology of that time was very similar to today. Equities had just started to warm the hearts of the investing public again after contending with a post-1987 crash and early 1990s recession. The jaded memories of losses suffered in the past were still too fresh for investors fully commit, however. They were skeptical of Wall Street. Skeptical of future economic calamity. The professional investors, fund managers, traders, analysts of the time were not much better. Much like today, they were confusing what was really the beginning of a bull run with what they perceived to be the end of a bull market. After all, from the low of the 1987 crash up to November of 1995 the Dow had risen close to 130%. Not unlike the Dow of today that has risen a little over 100% from the 2009 lows to November of 2013. The truth of the matter, as investors of all pedigree were soon to find out, was that the markets were only getting started. From a technical standpoint, the most pertinent information as it relates to Q4 of 2013 is that during Q4 of 1995 the Dow experienced a powerful Q4 rally that drove the Dow up 8% following an extended consolidation. I outlined that point in this chart included in that article from September. A majority of those gains were experienced in November of 1995. We are in an extended consolidation for the Dow. It is November of 2013. The correlations are vast and deep in nature. It is not a coincidence at all. Look into the trajectory points. Look into the sentiment at the time. Look into the attitude towards equity...
OCTOBER WAS A CURMUDGEON
The 4% plus gain the S&P 500 managed to glue together for October was a bit deceiving. October was a curmudgeon anyway you look at it. In fact, it was difficult enough that you could get the direction of the market right, but still end up with a flat month. This was the first time in 5 months that my managed portfolios underperformed the S&P 500. They did it in spectacular fashion, allowing a near 500 basis point catch up for the S&P. Nobody cared about my investments during October. That’s the gist of what occurred. I sat and watched what amounted to a snails pace trajectory of lowered bids and offers. CIDM, which managed a 19% gain for the month, couldn’t gain its footing beyond one vertical day which caused a majority of the gains. The company announced that it is on its way to becoming a leader in the world of digital entertainment to a chorus of crickets. That’s what a 19% gain is in contrast to their merger and glistening new business model. The tone of the CEO alone during the conference call following the merger announcement made me want to keep clicking the buy button until my mouse broke. But then I remembered he was just granted a tidy stock compensation package just a month before the merger was announced. Not a coincidence. In fact, it is a testimony to the fact that he knew following this merger the stock wouldn’t see 1.50 again, which is the strike price of his options. It’s a transformative move. Management knew it. And I think they expected more pop in the price to at least $2 by this point. I know I did. The S&P got a chance to catch up to me this month. But who was leading that parade? And is it a parade that I should be jealous of not being invited to or glad that I didn’t get an invitation? Let’s look at the leaders over the past month: - Greece was up 19% - Basic materials were up 5% for the month - Real estate index up 4% for the month - Healthcare was another leading gainer - Utilities and Consumer Goods round it out Big cap tech and retail were also in that list. As we all know, big cap tech was selective and choppy during the month. The rotation from the new school of momentum into the old school of momentum caught a lot of investors off-guard. Once in awhile a retiree that reads Investor’s Business Daily religiously is going to make me look like a rank amateur just by sitting on...
THOUGHTS ON DAN LOEB, FACEBOOK, THE CURRENT MARKET, THE FUTURE MARKET AND LESSONS OF THE PAST
- A pretty scathing article about Dan Loeb published in the December issue of Vanity Fair. I knew Dan Loeb before he was Dan Loeb, instead referring to himself as Mr. Pink. Mr. Pink was active on the Silicon Investor message boards in the 90s, having a good sized following among investors. Even back then, he was as abrasive as anybody you would ever come across. Message boards in the 90s were like the Twitter of today. In fact, I often think of Twitter as the modern version of the message board. The Dan Loeb of the 90s was a talented individual. He broke down the case for investing on both the long side and the short side of companies in a well thought out manner. His analysis was typically accurate. You could immediately tell that he got a certain joy out of shorting small-cap names that had a questionable management team or operation in place. He did go after incompetent and in some cases, criminal management teams. He did have help in discovery, however. There were others that participated in the same game of overthrowing supposedly corrupt CEOs. Most notably, Anthony Elgindy aka Anthony@Pacific on Silicon Investor. Mr. Pink and Anthony@Pacific did have a fairly healthy online relationship before Mr. Elgindy was convicted and sentenced to many years in prison for a bunch of financial related crimes. He was recently released, I believe. It seems that with all the enemies Dan Loeb has made over the years, we may be in the process of witnessing the good old American sport of “bring you up just to tear you down,” with this Vanity Fair article kicking off the parade. Pretty sad if this is the intention, as I think whatever success he has achieved he does deserve, regardless of whether or not you agree with his “pull no punches” investment methodology. - If you are a believer in the FB/YHOO correlation study (I don’t know why anyone wouldn’t be at this point given how accurate it has been in calling FB from the middle of last year), then this is for you. According to that study, Q4 for FB should be flat. I would say a range between 45-55, which is what the stock has been carving out here recently. According to the study, FB should begin moving up again in Q1 2014, headed for close to $100 before the end of 2014. - If you are a believer in October ending badly, then I have something for you too. Today was bearish anyway you look at it. The action in the Russell was especially atrocious. The action in the S&P wasn’t...
5 WAYS DIVERSIFICATION FAILS INVESTORS EVERY TIME
Let’s get right to it: 1. To diversify a portfolio is not to mitigate risk. This is one of the most popular misconceptions that exists on Wall Street. It is bought into by a vast majority of the public, as well as the vast majority of financial professionals. Diversification, instead of being a tool for mitigation of risk is actually a tool for transferring risk. By having a portfolio of 50 stocks, the resulting effect will be a closer correlation to the popular benchmarks. Saying that diversification is a tool for controlling risk is similar to saying that buying SPY is a method of controlling risk. It’s not. All an investor is doing is transferring the responsibility to manage portfolio risk to the market itself, which is no method of risk control at all. 2. Diversification increases an investor’s expenses when there are a multitude of ways to create the same effect. Wall Street institutions have created literally thousands of tools (ETFs) that create the same result as having a portfolio of 20, 40 or 100 separate names. Anytime you move over the 15 individual stocks mark in your portfolio, odds are that an ETF exists that will create the same effect for a fraction of the cost. 3. Diversification increases an investor’s propensity to become confused during periods of adversity and in fact, prosperity. By diversifying a portfolio an investor is not able to comfortably put together logical reasoning for the behavior of the portfolio at any given time. Instead, perhaps rightfully so, an investor begins to attribute performance to favorable market conditions, as opposed to any solid research that identifies favorable investment opportunities. During adverse periods, an investor will not be able to identify whatever leaks exist in the portfolio, with the exception of comparison to a benchmark as a means of assessment. Again, what is occurring here is that the portfolio is benchmarked to the point that all decisions are made relative to the benchmark itself. There is no separate structure to define risk outside of the benchmark, much less individual understanding of the investments in the portfolio. 4. Diversification increases an investors propensity to panic during periods of adversity. This is primarily as a result of complete confusion as to what is occurring outside of the popular averages. When a portfolio is diversified into 20 or more companies, what takes place during bear markets or even severe corrections is that individual pockets of strength in the portfolio will be overlooked, especially when panic sets in. It’s very logical that when a large number of companies that an investor doesn’t understand properly are all doing harm...
EXCELLENCE IN A BULL MARKET
There are only a few ways to really excel in a bull market. And by excel I don’t mean bringing in a few shekels here and there through a disciplined trading strategy that relies on using breakouts or successful tests of a 50 day moving average to enter positions. That type of stuff, frankly, belongs in the amateur hour part of the Wall Street show, having no place in a voracious bull market that has potential to be historical in scope. What I do mean by “excel” is to create a multi-year period of returns that takes advantage of what a secular bull market is at its essence. And what a secular bull market is at its essence is a period of time when expectations that are black and white are exposed to numerous grey areas that cannot be explained, much less understood. This devastation of prevailing expectations comes in stages, popularly defined as early, mid and a late cycle rally. Each stage has separate significance to the expectations of investors and how they are reacting to those expectations. At its latest stage, expectations not only catch up to stock prices, but then start to move far ahead of price, which marks a finality of sorts to the secular bull market. A mass acceptance takes place of grey areas replacing the standard black and white perception that marks investor thinking. The realization that I keep coming to terms with after close to 20 years in this business is that there is no better level of returns that can be gained throughout such a period than to take a focused, long-term approach. I don’t mean to sound like a mutual fund commercial when I say that either. It is not the typical focused, long-term approach that the numerous articulate incompetents that populate Wall Street like to dictate to clients as an excuse for poor performance. By focused what I mean is that your universe of investments is small. Abundantly small. I don’t mean 40 or 50 names. I mean 10-20 names, preferably no more than 15 that you know inside and out. Companies that you are intimately familiar with like a proctologist would be to any asshole. Companies that you can assess on an immediate, real time basis when it comes to earnings report, mergers or managerial changes. You become so familiar with your tiny universe of stocks that you are an expert in everything these companies can do, have done and will do on both a fundamental and technical basis. You can’t be an expert when your universe consists of a new stock every week. You can be journeyman,...
THE RESISTANCE LEVEL THAT MATTERS THE MOST FOR THE BULLISH CASE GOING FORWARD
We saw last week that the S&P 500 passed its test of support with a dramatic thrust off a key trajectory dating back to the 2009 lows. We now look for the next driver of the markets to propel it past the mud pit that has marked October trading, thus far. There is one level of overhead resistance that matters the most for the markets in Q4. It, of course, has to do with technology. And, of course, it has to do with the top 100 technology companies on the Nasdaq. In true Q4 fashion, the index that will usher in an end to this governmental led vacillation of the absurd variety is the Nasdaq 100. Here is the view: click chart to...
HERE IS THE ONLY CHART YOU WILL NEED FOR THE REST OF 2013
Symmetry matters in the markets. It is a point I have attempted to emphasize consistently over the past few years. The chart below shows about the most perfect example of symmetry in action during a bull market that you will ever see. The ramifications are bullish in nature, with a significant probability of this week's low being it for 2013. click chart to...
THE MOST PRECARIOUS BUYING OPPORTUNITY OF 2013 IS HERE
We will begin with the most obvious fact: It is October. We will continue with the next obvious fact: We are in the midst of a governmental shit storm that is turning into a game of who can hold their breath the longest. We all know that eventually somebody will either give up or pass out, leading to some kind of resolution. The question that should be of concern to every investor and for that matter, every American, is the amount of damage that will take place in the markets and economy, in the meantime. I will make it clear that I am extremely bullish for Q4. In fact, to zoom in even further, I am extremely bullish for October. The problem is that I believe we are in a precarious enough position in the markets and news cycle that we are looking at a potentially brutal slip before we see the bounce. I don't necessarily want to be buying into any kind of slip before a base is observed. There is no need to be the first man in at the bottom. In my nearly 20 years of watching bottoms take place, I have not witnessed one that did not give investors the opportunity to get invested once it took place. Everyone will have their chance to get allocated if they remain patient. In the meantime, defense should be at the forefront of one's strategy, as opposed to catching the bottom tick. Over the past couple of weeks in my weekly review, I have been discussing the possibility of downside for the markets. Just this past Sunday, I pointed out the 1660-1670 level as a point from which we can stage a significant rally. We got the first hint today that the markets are also looking at the 1670 level, as the low of the day from which a nice rally took place intraday was 1670.36. What can open Pandora's Box for the bulls is described in the chart of the S&P from today: click chart to enlarge Perhaps all of this analysis rooted in caution will be all for not when we get a resolution this weekend and the market can look forward to earnings. That's the hope. But, unfortunately, I don't know of many investors who have thrived on hope. In fact, it is quite the...
THE ASTOUNDING SIMILARITIES BETWEEN FACEBOOK AND YAHOO POST-IPO: PART 4
The counter-intuitive nature of the markets is one component of speculation that is without dispute. Human intuition is an asset in many situations we face on a daily basis. However, in the markets, it is a tool that investors use to deceive themselves into and out of positions they have no business being in, around or near. Our natural intuition or tendency as people is to want an explanation for not just some things, but for everything. This want has proven beneficial to consistent progress of humankind. Even when things are inexplicable, we tend to make up explanations that allow us to rationalize the situation, whether supernatural, spiritual or otherwise. That want of an explanation for everything that occurs transfers into the financial markets, as well. There are certain things that simply can't be explained. In fact, the need for an explanation inhibits the ability of the investors to profit from the situation. The most profitable opportunities in the markets are always those seem absolutely crazy because they fail at logical explanation. To take that one step further, it is often times the most logical investment thesis that will fail miserably because it attracts a consensus of intuitively driven investors who only choose to view the landscape in black and white without looking at the vast contrasts of grey that surround them. The relationship between FB and YHOO some 18 months following their IPOs fails explanation. It is, however, something I have been following since only a few months after FB came public. It started with the not so subtle headline of Facebook Is The Next Yahoo And That Makes It Very Bullish in August of 2012 when FB was trading at 20. In September I followed up with The Astounding Similarity Between The Yahoo IPO and Facebook IPO Continues To Be...Astounding in September. Part 3 of this study was posted in November with article titled The Facebook IPO in 2012 And The Yahoo IPO in 1996 Continue Their Strange Relationship. Now we have this...and it just gets more bizarre in the similarities as each month passes: click chart to enlarge What makes this study all the more plausible is the fact that we are following a very similar path as the market did from 1995-2000, when YHOO initially flourished. This is another study, although more macro-related, that has come in multiple parts over the past 12 months, the most recent of which was outlined here just this past week. The confluence of events that suggest FB is not just going higher, but much higher is simply too great to ignore. The question of what happens next can probably be...
THE DOW OF 1995 IS PROVIDING A PERFECT ROADMAP FOR THE REST OF 2013
Over the past couple years, I have presented numerous bullish studies that have pointed to a rally that is on par with what we saw during 1982-1987 and 1995-2000. Both of these were 5 year rallies that presented significant technical clues as they were getting started. The technical clues were focused around trajectory points. For those of you who have been following along for the past few years, trajectory points along with volume are the only technical tools I use to gauge price. Simply put, a trajectory point is a means of gaining perspective into price. There was a scene in the movie "The Aviator" where Howard Hughes was making "Hell's Angels." During the initial filming he was disturbed by the fact that the planes looked like they were moving slowly or not at all against a clear sky. It was only when he filmed the scene against a backdrop of clouds that viewers were able gauge how quickly the planes were actually maneuvering. Trajectory points are essentially the clouds that allow market observers to gauge how quickly the market is moving. Without them you have no reference point from which to measure movement. Where I was incorrect in the past study of the 1987-1995 market was where the market was in relation to breaking away from the trajectory. When I posted this chart in October 2012, I was expecting the market to begin accelerating away from its key trajectory point in 2015 based on where the Dow was relative to the 1987-1995 roadmap. Instead, it started its acceleration this year. What I think is important to pay attention to at present is the behavior of the Dow as it pulled away from its trajectory point in 1995. This is the exact same trajectory we are pulling away from at present. I am posting monthly charts to give a clearer picture of what has occurred as well as what to expect. The first chart is a long-term view of the trajectory point dating back to 1995 for reference: click chart to enlarge The second chart is the 90s Dow versus the current Dow as they accelerate away from the same trajectory after hugging it in the previous years. Many striking similarities as noted in the...