WRATH OF THE MATH
Jan26

WRATH OF THE MATH

There isn't much to do in this market. Hopefully, you allocated to the long side sometime ago and are enjoying the current gains, without much anxiety of getting ripped apart in a pullback. If you do find yourself with a lot to do, in terms of activity, then odds are that you are either (1) a short-term trader (2) you are doing something wrong. Let me elaborate on the second point since the first point is self-explanatory. If you have activity here then odds are that you are either buying into new positions heavily counting on this very bullish start to the year to continue OR you are liquidating in anticipation of the uptrend ending right around here. You could be right in either scenario. However, either way, you are making the wrong move. I hate to pull out a cliche poker analogy, but your being correct in either one of the aforementioned moves has less to do with skill and everything to do with luck. In any case, it has a negative expected value over the long-term. Whenever the market gets you to make the wrong move, then you have made a play with a negative expected value regardless of the outcome. Over the long-term you will lose money making the same mistake, irrespective of your short-term results. The reason why being active at these levels with either new investment buys or liquidating your portfolio has a negative expected value has everything to do with probability based on the understanding of price. The markets (Dow, S&P and Nasdaq...even the Tranports) are all tagging significant upside resistance points at the same time. More importantly, they are doing so very early in the year, during a period when institutions are eager to put money to work indiscriminately. Coordination in hitting or penetrating resistance points among varying important averages does have a high probability of retracement. This becomes especially true when the coordinated hit or penetration comes during the first few months of the year. The very same individuals who are hitting the buy trigger in an eager rush to allocate assets to equities now have 11 more months in 2013 to become frightened out of those positions. Not to say that every Q1 move to the upside gets retraced. However, those that are coordinated in hitting important resistance points while in Q1 have a significant probability of seeing retracement. That makes this general area of the market an undesirable point to allocate new funds into equities due to the significant probability of loss. So why is it an equally terrible decision to liquidate or begin liquidating a portfolio here? Again, it...

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A COMPLETELY IRRATIONAL (OR IS IT?) LOOK AT THE DOWNSIDE IN AAPL LONG-TERM
Jan23

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...

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HERE IS WHAT TO EXPECT ON THE DOWNSIDE FROM THE MARKET OVER THE NEXT FEW MONTHS
Jan20

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...

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CLOUDY WITH A CHANCE OF FURBALLS
Jan17

CLOUDY WITH A CHANCE OF FURBALLS

To think of oneself as a patient market participant is a sign of maturity as an investor. Most of those who are just becoming acclimated to the various nuances of the financial markets are quick to jump at the first shadow. Many of those, in fact, who attempt to create wealth through financial speculation of any sort are plagued with a mindset of risk AVOIDANCE instead of risk CONTROL. Avoiding risk is what short-term traders attempt to do on a daily basis with an erroneous mindset that not being involved heavily overnight or keeping tight stops is a competent form of risk control. Instead they wind up getting minced through the teeth of the market as a result of stops that are too tight, markets that are too efficient and patterns that stopped working when Iomega was the "it" stock. In my article "An Ode To The Short-Term Trader" I went over all of the obstacles faced by the short-term trading community in the current market environment.  It seemed to resonate as it is the most popular article I have written on this site in the two years it has been up. Risk control is another animal entirely. It does not involve setting arbitrary stops or being overly-conservative to a fault. It simply involves having every aspect of risk in the portfolio planned out. You know where your allocation will be if the Dow is at 13,000. You know where your allocation will be if the S&P is at 1600. You know how to respond to a 5 percent drawdown in equity. You also know where you will be if it gets to 10 percent or more. A road map of risk that controls risk and DOES NOT avoid it. After all, we are in the markets to make real returns. By that, I don't mean inflation adjusted returns, I mean REAL returns. Controlling risk is how you get there. Avoiding risk is not. With that soliloquy out of the way, I can now focus on the real purpose of this posting . While the Dow did post a very positive close on a technical basis, we have now moved to a point where risk/reward has shifted to the downside for the overall market. This does not at all mean that a ferocious pullback is imminent. It simply means that the upside bias that has become a comfortable backdrop for the market early into 2013 will start getting a little bit uncomfortable from here. In my posting on January 3rd (The Road Map For 2013: Same Rules Different Year), I determined the road map for 2013 would continue to follow...

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IS THE KEY TO ANY MARKET TOP BURIED IN THIS PRICE TARGET FOR THE SOX?
Jan13

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...

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HOW CONTRARIAN THEORY BRINGS OUT THE STUPID IN SPECULATORS
Jan12

HOW CONTRARIAN THEORY BRINGS OUT THE STUPID IN SPECULATORS

Stupidity can be viewed in full abundance every single day in the financial markets. There are microscopic incidences such as when a retiree invests in a Chinese coal miner thinking that it will make a prudent investment for his family's future. Only to find out a short while later that what he thought was a coal manufacturer in China was an enterprise solely dedicated to targeting those who suddenly think that by reading an article about China in BusinessWeek they have the understanding necessary to become the American version of Zong Qing Hou. Stupid. Then there are grand effigies built to the pursuit of stupidity. We saw a sweeping display of this recently when Bill Ackman of the hedge fund Pershing Square made a proud testimonial to his discoveries of fraud in the case of HLF. A two hour presentation documenting why he is the majority of HLF's short interest was on display for all to see. He may as well have walked through Harlem wearing a white robe and a pointy hood. Nothing says "I want a beat down" in the market like gloating in the face of all your peers about your enormous short position while tempting company management to come after you as you allege blatant fraud. No one wants to complicate their professional life that much...do they? One area of the market where a perpetual form of stupidity is on display is in contrarian theory. I will start by saying that the core of my belief with respect to the markets is rooted in the fact that financial markets are inherently deceptive in nature. Deception is as core to financial speculation as a bid and offer. Therefore, it would make sense for me to embrace contrarian theory in the markets, as I do wholeheartedly. Seeing a sign posted on the wall of Paul Tudor Jones office reading "WHAT IS OBVIOUS IS OBVIOUSLY WRONG" when I first watched the documentary "Trader" in the 90s was a revelation. Being a contrarian is essential to success in the markets. However, being a stupid contrarian is not. What is a stupid contrarian? One who simply looks at every indicator of investor sentiment that is pointing to anything remotely bullish and sees that as reason to believe that an end to an uptrend is within spitting distance. As an example, the buzz-worthy contrarian indicator of this past week was the fact that equity mutual fund inflows suddenly saw a spike in allocation not seen in years to start off 2013. This was automatically seen as an indication that the retail investor had returned to the market, thereby automatically putting a lid on any...

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WHERE IS ALL THAT WEIRD COMING FROM?
Jan09

WHERE IS ALL THAT WEIRD COMING FROM?

Brand new years always have a certain weird quality attached to them. First, a new year is somewhat of a depressing time. We emerge from the warm, cozy nature of the holiday season, where everything is familiar and inviting, only to find ourselves in an unfamiliar new environment. People who have been residing on their couches with bags of licorice and grape soda are suddenly drawn a gymnasium in an effort to push the unfamiliar onto themselves for the sake of improvement. Others are forming the strategy to escape from whatever it is they think is a detriment to their happy being, whether a job, relationship or one of the dozens of vices there is to choose from. It is as if a new, unfamiliar year causes us to embrace unfamiliarity in everything that we do. No wonder so many resolutions go unfulfilled. The market environment is much the same. As investors and traders, we are suddenly thrust into a reset environment where new targets, expectations for performance and dilemmas await our attention. While the markets seemingly haven't changed much simply because of the flip of the calendar, they sure do seem different with every new year. The first couple weeks of 2013 have just reinforced this idea...perhaps, more than ever. If the first nearly two weeks of trading are any indication, then 2013 is going to have a super sized portion of weird thrown into the mix. We started the year with that enormous Fiscal Cliff resolution gap up that automatically caused 95% of fund managers to start the year trailing their benchmark. We have since gone absolutely nowhere. All the meanwhile, leadership is rotating like the barrel of a Gatling gun. Apple is a laggard. Facebook is a leader. Transports continue to show strength. The Semiconductor Index does little to nothing on a daily basis. Mass discombobulation on a nuclear scale. It is an absolute bombardment of weird. But don't fret, corporate America will come to the rescue over the next couple of weeks with a bonanza of earnings that are sure to give us some ammo from which rational market action can be born. Lots of weird to start 2013. Here is to normalcy being born out of a struggle with the unfamiliarity in whatever the markets chooses to do in the year...

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THE ROAD MAP FOR 2013: SAME RULES, DIFFERENT YEAR
Jan03

THE ROAD MAP FOR 2013: SAME RULES, DIFFERENT YEAR

In mid-November with the Dow sitting around 12,600, I posted a study demonstrating why the Dow was poised to move to 13,500 by year end. The basis of this study was the movement of the Dow in and around its primary trajectory, pictured here. During the final summary of the Dow 13,500 study, I noted the following: If this study should continue to provide the road map to the current market based on the relation to the trajectory, we know the following: 1. There will be very little downside volatility in the months and years ahead. 2. There will be very little upside volatility in the months and years ahead. 3. The market will be in a very slow and arduous bull market in the years ahead that feels like it is prone to collapse at any moment. Sound familiar? We’re already seeing that honey. 4. Declines of any more than 5% should be bought hand over fist. We are currently at a 7.5% decline from the recent peak. I believe there is a very strong possibility that the attachment of the market to this trajectory continues throughout 2013. If so, it gives investors an extremely accurate road map every step of the way. Here is an...

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IT IS THE MARKET THAT HAS ISSUES, NOT THE ANALYSIS
Dec30

IT IS THE MARKET THAT HAS ISSUES, NOT THE ANALYSIS

My approach to each new trading week is a mind frame that assumes perfect information. By "perfect information", I mean that the analysis I have performed with respect to general market moves on a technical basis are perfect in nature. I don't say this out of a sense of false arrogance, overconfidence or any of the other pitfalls of ego on Wall Street. Rather, it is my way of functioning at an optimal level with respect to risk control as well as the pursuit of abundant returns. Last week was a prime example of a divergence between perfect information and the market, in general. I came into this past week with no inkling of the substantial amount of downside risk we faced during the week that was. In fact, I had the remainder of the year being bullish with a move up to 13,300 to 13,400 by year end. This analysis is the road the market should have taken in the case of optimal health or as I like to refer to it, symmetry. When the market is dysfunctional and unhealthy in nature, there is no perfect information. There are no support levels that can help. Price action is generally sloppy and broken in nature. All you can do as an investor is hide inside of your home, hoping that this dysfunctional subject doesn't drive a tractor through your front door. Defense becomes the only offensive measure of note. Another way to visualize it is with the simple act of opening the door to your vehicle and starting your car. You know, without any doubt, that there is an order of operation that takes place from the time you press the start button or turn the ignition. Lights start flashing, the engine turns over, your car turns on, the radio starts playing Def Leppard and the heater starts blowing through your feathery hair. This is perfect information. Now assume that you get into your vehicle, press the start button or turn the ignition and none of those things happen. You instantly know that your vehicle has been compromised in some sense. It is no longer functioning as it should. Your perception of the once trusty vehicle changes. For the next few weeks you become paranoid every time you start the vehicle after its repair. Your expectation of it functioning normally based on your analysis are correct in nature. However, your perception and the reality of reliability have changed as a result of an anomalous act. This is one example of perfect information with respect to an uncooperative subject. The question obviously becomes: How does this help me preserve and...

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A HEDGE FUND MANAGER, AN ANALYST STARING AT THE WALL, AND INSPIRATION
Dec27

A HEDGE FUND MANAGER, AN ANALYST STARING AT THE WALL, AND INSPIRATION

I will be going over the specifics of each current portfolio position during my year end review to be posted on January 1st. I've made it a habit this year to post my monthly letter to investors as a way of allowing readers further transparency into my process. It has been met with a fair bit of interest and will remain a staple on the site for the foreseeable future. A few months back I had a meeting with a hedge fund manager and several of his analysts regarding the potential to manage a portion of their funds. During the meeting, I was struck by the fact that one of his analysts insisted on looking upward toward the corner of the wall during the entirety of the meeting. I felt like Ben Stiller in Meet The Parents during that scene when Owen Wilson was describing his ex-girlfriend (who just so happens to be Ben Stiller's fiance) to him while looking off into the distance so intently that Ben Stiller's character has to turn his head to see if there was something on the wall he was focusing on. I found myself wanting to turn around to check several times. During the meeting, one of the questions that seem to be more pressing than any of the others was how I planned on raising assets from substantial types when I am giving away all my analysis for free on a public forum? I had never thought of that question so my answer probably wasn't as well articulated as I would have liked. I basically said that I gain tremendous insight from my own analysis posted on this site. It assists me in my management process. It allows me to showcase what I feel is a unique hybrid strategy involving both fundamental and technical analysis as it applies to small-cap companies. Plus I get to help a lot of individual investors not only create some capital gains but learn to look at the markets from a different perspective. What I am doing on this site and many others who post their thoughts, analysis and opinions are doing as well is resurfacing Wall Street. The mindset that demands a type of curtain to conceal the investment decision process is slowly being cut away. 10 years ago I would have never dreamed of a  large hedge fund manager making a 2 hour presentation regarding his favorite short position for all the world to analyze and digest. Yet Bill Ackman recently put together the Macy's Thanksgiving Day Parade, with Herbalife as the turkey, for the viewing pleasure of anyone who was interested. This isn't...

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