REDEFINING EXPECTATIONS FOR THE PUT/CALL RATIO DURING SECULAR BULL MARKETS
Let's begin this post with what I think is an obvious presumption: We are currently in a bull market that is secular in nature. I base this presumption on a number of factors, most important is the simple fact that numerous important indices are posting consistent all-time highs. Without getting into the technical particulars (these are easy to find if you spend 20 minutes on this site), all-time highs in leading indices following an extended period of crisis, doubt and under-performance can generally be trusted to signify a bull market that is much more than cyclical in nature. If we accept this presumption, then we must also accept the fact of what a secular bull market entails at its core: An expansion of ranges for all available metrics. This is regardless of whether these metrics are technical or fundamental in nature. In other words, price/earning ratios form an expansive new range. Markets caps that were previously thought of as absurd become the new normal. Technical measurements of excess are rethought and reformed. The very nature of a bull market is rethinking what are acceptable measures of prosperity. With each new secular bull market this rethinking process has occurred, which eventually has led to instability due to the paradigm shift that takes the economy into places where protective legislative and corporate measures fail. We are far from this point, but the reason it is worth mentioning is to aide in conceptualizing how dramatic the shift in the pricing landscape (ranges in price) must be that it challenges the very structure of economy. Let's now use the aforementioned presumption in paragraph one and fact in paragraph two to look at a favorite measure for gauging sentiment. The put/call ratio is one of the most valuable tools to measure sentiment. There is one consideration, however, that investors fail to make during bull markets. The absence of this consideration creates false signals galore that dissuades investors from considering the put/call ratio as a bull market matures. The consideration is the fact that just as multiples, market caps and technical indicators will face an expansion in what is seen as normal ranges, so will the put/call ratio. This means that the measurement previously considered to be golden at picking tops for a bull run, will fail consistently as a market matures. As a bull market expands, so should an investors expectations of what is considered "extreme bullish sentiment." Let's look at a long-term chart of the combined put/call ratio using 20 & 100 day moving averages only, looking all the way back to 1995-present: click chart to...
QUICK THOUGHTS: BRINGING IT
- The Dow is sitting at a tremendously important point of resistance. This was the stopping point I illustrated in the weekly review on Sunday. We are sitting on it almost exactly. There is a bullish and bearish scenario of what can transpire from here. I will go over both on the weekly review this coming Sunday. - The leadership of the SOX continues to be a bullish indicator for the market. - The leadership of the Nasdaq also continues to be an extremely bullish indicator for the market. - Speaking of the Nasdaq...the NDX (Nasdaq 100) is up against a pretty significant generational trajectory point here. Historically it has led to sideways or down periods for a number of months. Doesn't necessarily mean that it will this time, however. Again, I will go over this one in the weekly summary on Sunday. - Transports breaking out is another positive that is certainly worth mentioning. - Hate to be a broken record, but let's not forget about how well the Russell 2000 is acting. Another leader that is doing exactly what it's supposed to be doing at the exact right time. - Everything from the symmetry of the market to the leadership of specific indices falls in place. It speaks of the general health of this market and portends future price increases throughout Q4. - Interesting how the talk of the low put/call ratio was such a topic last week and has disappeared with a higher market. As discussed last week, the put/call was the incorrect focus at the incorrect time. Texture is everything in the market. - Michael Bigger had a cool piece on his website today about leaving $20 million the table on PCLN over the past 10 or so years. I have discussed this subject numerous times in the past, but feel it is important enough to pound away at it regardless. The real gains in the market are made by sitting tight. The wisest and most experienced investors will tell you this over and over again. Jumping around in a bull market is a fool's game. Your universe of stocks should be small and your activity in that universe should be as blissfully inactive as...
IS CARL ICAHN IN THE MIDST OF A BILL ACKMAN MOMENT?
Perhaps I am a cynic by nature? Perhaps I have been watching events on Wall Street transpire for too long? Or perhaps I realize that the market gods are a fickle bunch that turn their back on even the best of investors at the most public of times? Whatever this feeling I have regarding Carl Icahn and his love for AAPL is, I know that it is coming from a place where alarms naturally tend to sound whenever someone is so public, enthusiastic and popular in their opinion regarding a company that is so readily admired and adored. Icahn, it can be argued, is now at the pinnacle of his success. He is coming off of several outstanding years, in which he has posted well above average for his investors. He seems to be winning his mud wrestling match with Bill Ackman by being temporarily, at least, proven right on his HLF investment, much to the detriment of Bill Ackman's short position. More importantly, all of these successes have been extremely public in nature. He is confident to no end. And the market is giving his advice regarding potentially lucrative investments a warm massage and a serving of steak tartare, in the form of premiums that immediately come into the marketplace whenever mention is made of a Carl Icahn investment. With AAPL he has been especially public, taking to Twitter in order to communicate his enthusiasm. Using phrases like "no-brainer" to describe the AAPL investment, that in turn makes those who choose to follow Icahn into hormonal teenagers, clenching their hands together while crying beneath him in horn-rimmed eye glasses and velvet mini-skirts. AAPL is, arguably, the most popular public company out there today. And Carl Icahn is one of the most popular investors of our generation. This combination of the most popular company with one of the most popular investors feels much too much like Icahn's "I am a Greek god" moment. It has all the makings of a spectacular dive that has no choice but to go wrong. Just look at those who have recently come before Icahn in soiling themselves both in front of the public and often times on the public, as investors of all pedigree are only too happy to hop on the love train. John Paulson became a hero with subprime CDS. He was an investor that was to be followed. His form 13-F (for those of you unfamiliar, this is the SEC form that fund managers are required to file quarterly showing current holdings) became a biblical account of how one's portfolio should be structured. He subsequently falls flat into a sea...
9 DIVERGENT THOUGHTS TO GET YOU THROUGH THE REST OF THE TRADING WEEK
- An old magician's trick: The market has everyone looking one way while the real magic is taking place elsewhere. In this case, the put/call ratio seems to be throwing people off the scent. The more sophisticated among us seem to think this signals an impending pullback. I beg and plead to differ. The low put/call ratio is the diversion. Pay it no mind as it is only good for a few shekles on the downside, at most. - The real magic is the symmetry with which both the SOX and S&P have moved off key trajectory points. The weekly review on 9-2, I pointed out that continuing strength in the SOX into the end of that week would be a buy signal. The buy signal did come at the end of last week. Here we are now rising steadily forward. This is no coincidence. Symmetrical markets (markets that respect their trajectory points with volatile upside reactions) are healthy markets. - Financials are now in an uptrend, adding a valuable cog to the engine of the market. - Speaking of financials, I will reiterate the fact that regional bank companies are exhibiting a symphony of bullish behavior that is an absolute delight for anyone that thinks beyond a 6-12 month time horizon. It has been a long time since I have seen a sector that has seen (1) rapidly improving balance sheets (2) tremendous insider buying (3) a return to profitability (4) a technical picture that is brilliant. This is across the sector, in literally dozens of names. My favorite sector in the markets currently. - You want a buy signal that is perhaps more exciting than the SOX recently? The Nasdaq Composite at multi-year highs is it. I discussed the fact that the Nasdaq was back in the bulls court this past weekend here. - Transports are now back in an uptrend. Another bullish indicator. - I've received several questions regarding IWSY recently. I am happy with my sales from 2.20-2.70. The stock was confusing to me during August when I reinitiated the position and then quickly sold it. The stock remains an enigma now. Don't know what to make of it at this point. Fortunately, I am not in the business of trading "don't know." I invest in clear situations where I have a complete grasp of the risk, the reward, the catalysts and the technicals. - Regret during bull markets comes in the forms of adhering to proven risk strategies. This way, traders become comfortable enough being reckless that the next bear market or even correction that comes along can cause serious damage. Getting out of...
TRIUMPH OF THE ILLOGICAL, MUTANT HYBRID INVESTOR
Illogical thinking, by definition, runs contrary to prevailing rules or wisdom. It is often times seen as a reckless act that can endanger one in any number of ways. Whether through injury, incarceration, disease or even death. It is illogical thinking that is often blamed for the travails of an individual. It goes without question then that the average investor will have great difficulty in grasping onto the concept of illogical analysis often times leading to the best results. There is no means of contrasting illogical thinking in finance with illogical thinking in everyday life. We can simply put illogical thinking into the basket of bad things to do, without regard for context. Let's look at all of the illogical events of 2013 thus far: - TSLA is up about 400% this year. Coming into 2013 it was heavily shorted, range-bound and overlooked as an investment by most. It is trading at 15 times sales, 33 times book and more than 100 times forward earnings. Logical arguments, such as comparisons in valuation to other car manufacturers, are thrown at the company everyday. Illogical by any stretch. - YELP is up nearly 250% this year. This is the only social media stock that I have issued a research report for way back in April of 2012. My core reasoning for the investment was that it was so illogical that it would be proven correct. In fact, I ended the research report with this: I am comfortable, however, that there is substantial upside to be had here as rational thinking fails investors once again. An illogical move in YELP this year by an stretch. But once again, a powerful move. - LNKD continues to appreciate dramatically on the basis of seemingly illogical appreciation. I 2011, I posted an article about how the dynamic between logical/illogical thinking makes LNKD a better investment than AAPL. Logical thinking doesn't win on Wall Street, in any way, shape or form. - FB is up nearly 50% this year. When the company was trading below 20 there was nothing but logically based praise for a market that was treating FB as it was supposed to be treated. Logic explained perfectly well why FB not only didn't deserve a valuation at $20 per share, but likely was a single digit stock. The typical articulate incompetents that reside in the hedge fund world even chimed in, this time via SumZero, with a research report about how FB was headed to $10 per share. Logical thinking maims investors again. - The market itself is the perfect study into the power of illogical thinking. There is not an analyst out...
AN UPDATE ON THE DIRTY SOX
There is a certain value that comes from being old school. It is your choosing whether you utilize that wisdom to be that crooked old man who has memorized every episode of Bonanza or if you use it for more noble causes, such as practicing prudent and patient methods in speculation. I'm from the old school. I believe in the power of pagers. I like reruns of ALF. I often wonder what happened to guys like Special ED and Kwame. Rewinding VHS tapes before you took them back was a lesson in courtesy and sometimes, patience. Ricky Shroder is still cool. And Kirk Cameron is kinda creepy now. Along those lines, there are certain old school market indicators that are worth their weight in gold. One of those is the SOX. I went over the SOX in detail on July 29th, in a post titled: Is The SOX Foretelling A Major Correction In The Months Ahead? Now is a good time to bring up the SOX because it is on the verge of violating a technical point that is as important as any. Since 2010, a break below this point has occurred three separate times. In each case, the market went into a multi-month sloppy, corrective phase that was best avoided. Three times does not a statistic make...I know. However, given the other negative technical events that are taking place, this certainly bears watching. The first chart shows the failure of the technical point and what is has led to in the past. This the same chart posted in the July 29th posting: The next chart shows the SOX at present. We are awfully close here. Important see how we end the...
THE FUNDAMENTAL THEOREM OF INVESTING
Those of you who have been reading my stuff for a long time know that I am a big fan of poker theory. I enjoy reading blog posts into poker theory by the top pros into the game. Their thinking into approaching risk and properly assessing countless situations involving imperfect information is the most valuable contribution an investor or trader can make to their repertoire. Forget all of the useless blog posts that 99% of the "popular" bloggers or pundits are putting out currently. They are largely built on feeding popular perceptions in order to retain readership: Bill Ackman is bad, I will write a blog post about Bill Ackman being bad; Facebook is a terrible investment, I will write a post about Facebook being terrible; Facebook is a good investment, I will write a blog post about how great Facebook has become; Tesla is a great company, I will write about how great Tesla has become even though I never mentioned it while it was sitting at 30. Popular perceptions won't give you an edge, they only take you one step closer to being a pasture animal waiting for the abattoir (credit Miles in one of my favorite movies: Sideways). However, looking into the mind of a professional who is faced with literally hundreds of decisions daily involving: Calculating odds, mathematical expectations, deception, game theory, inducing, analysis of opponents, changing pace and texture of play....that is valuable. That can be a game changer for any trader or investor. Grasping onto these methods naturally, making them into a consistent part of your overall investment game will take any trader or investor from good to great. The Theory Of Poker by David Sklansky is a great place to start. In the book Sklansky introduces the fundamental theorem of poker. Wikipedia describes it as follows: The fundamental theorem of poker is a principle first articulated by David Sklansky that he believes expresses the essential nature of poker as a game of decision-making in the face of incomplete information. “ Every time you play a hand differently from the way you would have played it if you could see all your opponents' cards, they gain; and every time you play your hand the same way you would have played it if you could see all their cards, they lose. Conversely, every time opponents play their hands differently from the way they would have if they could see all your cards, you gain; and every time they play their hands the same way they would have played if they could see all your cards, you lose. ” The fundamental theorem is stated in common language, but its formulation is...
WHY IT IS KIND OF TIME TO BE KIND OF CAUTIOUS…KIND OF
I feel compelled to qualify any seemingly bearish titles with cushions of preordained defeat, such as phrases like "kind of." This is a legitimate means of dealing with the psychological ramifications of a market that has been as one sided as any we have ever seen. Surely, this must be a sign that bullish sentiment has hit a crescendo, you may calmly be muttering to yourself. It actually may have this time. I would caution, however, that I believe strongly in weekly closes being a much more powerful signal than anything on a daily basis. I am curious to see how the market closes this week. Continued weakness, persisting into the close on Friday, will certainly bolster the bearish case for the markets into the end of August. Here are some of the reasons I am worried as a participant who is sitting on a good amount of net long exposure: - Financials (BKX) are comfortably residing below a key technical point that has marked a slowing of the bull trend twice before this year: April and June. I'll illustrate this coming weekend. - The Nasdaq seems to be in the mood to make just a slightly lower high here. An acceleration/range expansion to the downside from this point is highly negative for the Nasdaq into September. - Dow Transports - a leader during this entire bull market - have suddenly started to look precarious in both their technical pattern and the volume that is accompanying the technical pattern - The Dow is in the process of violating a fairly significant short to intermediate term technical point. Again, watch for the weekly close here. - Market leaders such as GOOG are starting to display accelerating downside momentum - Commodities are starting to get way too perky. Copper as a recent example. Crude oil, of course, as well. Precious metals are also starting show some resilience. We haven't experienced this throughout 2013. A change in the macro landscape of this nature is always something to pay attention to. - The biggest concern perhaps is with the SOX. It is getting daringly close to a key technical point that has led to some pretty harrowing market action in the past. I covered the ramifications of a break of this technical point recently here. Let me clear with the following: In a bull market of this caliber, signs such as the aforementioned are not a reason to get short, move to 100% cash or begin reading ZeroHedge again. Systematic, deliberate and calculated modification of risk is all that needs to take place. As an example, if you are leveraged here and the...
PORTFOLIO UPDATE: WHAT WOULD YOU DO IF I SANG OUT OF TUNE?
During the trading day Thursday, I posted the following: First, you will have to excuse my propensity for absence as of late. I have been busier than usual with spreading my gospel of uncorrelated, risk-adjusted market returns utilizing a small-cap strategy layered on top of a tactical asset allocation method in order to control risk. This involves more meetings and travel than I am regularly used to. I prefer a secluded life, frankly, that involves snarling at my children when they make me angry and scolding my wife when she cuts my apples too thin. The markets, while being gracious in their demeanor towards all those who sing its praises, have become somewhat monotonous in nature. This monotony makes for difficult story telling or blogging, if you prefer. We are in the midst of an uptrend, within an uptrend, within an uptrend. This type of one-sided market movement is an intellectual market observers worst enemy due to the fact that any seemingly wise analysis is rendered useless upon arrival. That is not to say that those who are long the market are moronic by any stretch of the imagination. It is just to say that being an intellectual on Wall Street is about as overrated as cupcakes. Its a piece of cake cut into a small circle. There is nothing cute about it. The idea of this ultra-smart, number crunching machine analyzing spreadsheets and making sophisticated business decisions is part of the image. It doesn't stand up to reality. The reality of it is that the ones who have longevity in this industry possess vision, discipline and an edge that sets them apart from the stampeding, drooling and robotic herd. The same herd that things trading for a few points here and there is going to drive their net worth into the stratosphere. The same herd that believes diversification is a method of risk control. The same herd that thinks applying stale ratios of value to an emerging technology sector will tell them whether a company is a long or a short. Let's get back to the subject at hand: I am now up to a 100% invested as a result of putting back on a small position in IWSY. I have also added to SPNS over the past couple of weeks. There is a nice performance cushion in place for this month as well as a cushion for the year that is allowing me to take on a little more risk than I usually would. I am a big believer in leveraging gains to create more gains when you have them. That is how big years are built....
IS THE SOX FORETELLING A MAJOR CORRECTION IN THE MONTHS AHEAD?
If you came up in the old school, you realize the value of the SOX (Semiconductor Index) as a predictive indicator for technology and thus the entire market. While the SOX is not nearly as relevant in the grand scheme of technology as it was a decade ago, its predictive powers should be no means be discounted by those among us who did not witness the days when hardware ruled technology investing. While it has grown increasingly repugnant to have a bearish slant on anything but Treasuries and precious metals in 2013, there are certain pieces of information that I feel compelled to pass on, if for nothing else but to open the eyes of investors to possibilities that are not currently being entertained. It is after all during the most "feel good" periods that the markets decide to unveil a can of whoop ass on investors, leaving those who are unprepared scurrying for the comfort of their mother's bosom. There is certainly an excess of "feel good" here and now. It is noticeable. Much more so than at any point over the past few years, I would venture to say. The action and attention that is being paid to companies like NFLX, TSLA, AMZN and FB is reaching fever levels. Furthermore, investors in the handful of popular names that are favored in the current market have piled on top of each other to the point that when a pullback does come, whether beginning this Friday or 20 Fridays from now, the downside volatility will be extraordinary. With that said, I would like to point out one valuable piece of potentially bearish information that caught my eye today. The action in the SOX is not only severely lagging the rest of technology, it is correlating perfectly with a previous incident in 2012 that just so happened to take place above the exact same trajectory. To make things even more compelling, let me add that each and every time the SOX has broken this trajectory to the upside and failed since 2010, it has led to a repugnant period for the markets in general. The charts below will illustrate my point, beginning with a daily chart of the SOX, followed by a weekly SOX chart and ending with a weekly chart of the S&P 500 to show how the general market reacts: click chart to...