EVERYTHING IS EVERYTHING
Yesterday I posted a detailed study looking into what I believe is a significant relationship between the post 1987 market and the post 2008 market. The obvious question after posting such a study is what tangible difference to portfolio net exposure will this study make? Here is the answer: None. I'm going into this week net neutral, with a TZA hedge that is up 18% since I initiated the position on October 10th to a chorus of boos and jeers in reaction to my emerging bearish bias. Despite the fact that I strongly believe the study I posted yesterday makes this an astoundingly promising risk/reward spot for initiating equity exposure, I am bound by a system of allocation that I follow through thick and thin. I know full well that this system will cost me in some spots. I expect this to be one of those spots. My TZA hedge will probably be exited with a single digit percentage profit instead of the 18% it is currently at. I am perfectly fine with that. I know that my method of allocation, over the long run, has a positive expected value. That is all I care about. The long term equity curve and return data is my concern. If I were to abandon my methodology based on one study - and worse yet be successful because of that abandonment - then I open Pandora's Box into a realm of volatility that I don't necessarily want to experience. The studies I post to this site assist with clarity. They allow me to read the playbook of the market, which inevitably helps me pad my performance numbers as a result of foresight. I can't emphasize enough how important it is for traders of all sizes and methods to have some mechanical method of allocating assets. It protects wealth and allows you peace of mind through even the most treacherous market environments. Additionally, it doesn't allow you, as an investor, to be swayed by every data point that comes your way throughout the day. Believe in something or you will fall for...
CASE CLOSED: THE DOW ENDS 2012 NEAR 13,500
A step by step study of how I arrive at this conclusion follows: On October 24th, I presented a study titled "How 1987-1992 May Present The Holy Grail For The Market." It is not your traditional correlation study simply providing an overlay of current prices with prices from a similar period. This study looks into how the market of present day is reacting so similarly to an identical trajectory. In order to give you a better understanding of the trajectory, I first want to show a quarterly chart of the Dow going back to the 1932 bottom during The Great Depression: click chart to enlarge It is obvious the tremendous amount of influence this trajectory exerts over the market. The question becomes how does this study relate to present day. Let's first take a look at the exact same trajectory and the stunning similarities between the 1987 and 2008 declines in relation to the trajectory: The similarities in calamitous events have been remarkable thus far, as has been the recovery since. Here is a closer look at the behavior of the current market versus 1987: Now for the money shot. 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. 5. This entire decade will not see a bear market. Only corrections within a bull market. Where are we in relation to the 1987-1995 period? Here is your road map. Treat it with the respect it deserves: Let me clear my throat............case...
WRONG SIDE OF THE TRACKS
Today wasn't supposed to happen. It was in the lower ring of any possible outcome given where the important market averages were sitting. It was anomalous. A cancer. A complete and total foreign body. And it must be respected. Every move the market makes tells a story of its past experiences and its future expectations. There is very little that occurs without some sort of underlying intention. There are degrees of intensity that translate into importance within the grande scheme of a short, intermediate or long-term move. However, nothing simply occurs for the sake of occurring. Meaning is littered throughout the averages and individual stock prices. When a cancer (otherwise known as a statistical anomaly) appears in the markets, it has to be assumed that the carrier itself is not functioning as it should in one capacity or another. Take 2008 as an example. There were multiple periods of time where the market should have behaved a certain way at important points of support. Instead, anomalous event after anomalous event took place, warning those who do not simply subscribe to the countless mindless market memes in existence, that there were serious underlying problems in the market. It was a diseased body looking for a place to collapse. Far too often, there are those who adjust their expectations according to the anomaly. In other words, the anomaly is stripped of its repugnant nature and acknowledged as an event that falls within the normal range of expectations. A minority of investors will realize, in time, that anomalous events are the equivalent of a canary in a coal mine. Ignore the canary and your entire party is doomed. I mentioned in the weekly analysis that I DID NOT want to see the S&P 500 fall into a certain range. Unexpectedly, we did exactly that, reaching beyond any reasonable point I had in mind for this pullback. Understand I am not bothered because I have an abundance of exposure. I don't. I am market neutral here, sitting on a majority cash position. What is bothersome is that I am getting further and further away from the possibility of putting any cash to work. Furthermore, it is beginning to look like the possibility exists that my long-term trend indicator will flip to "sell" forcing the portfolios into a 90%+ cash position. On a positive note, halfway through the month the portfolios are up nearly 3% this month, mostly as a result of TZA moving up in price while the remainder of the portfolio has basically sat flat. One thing to smile...
THE FACEBOOK IPO IN 2012 AND THE YAHOO IPO IN 1996 CONTINUE THEIR STRANGE RELATIONSHIP
In 1996, I traded the YHOO IPO on the day it went public for clients. I remember the sentiment at the time of its IPO was very similar to FB: Unbounded skepticism, followed by valuation propositions that simply didn't add up, topped off with what seemed like a failed IPO at the time. In August of this year, after it was clear that the FB IPO was a complete debacle, I decided to do a comparison to the YHOO IPO based on the memory I had of the perceived failure in 1996. The correlation between the two was astounding. I followed up with another study tracking the correlation a month later. Again, astounding. Here is the third installment of that correlation study, comparing YHOO to FB six months into their respective IPOs along what it means for FB in the months ahead. click chart to...
TIME TO CATCH THE FALLING APPLE
As I was stretching my fingers to prepare for typing this post, I was wholeheartedly prepared to issue a diabolically negative report on AAPL, warning of utter catastrophe and suffering over the long-term for shareholders. In reviewing the long-term price action for AAPL, however, I don't feel that the long-term picture presents enough information to make any concrete determinations of the bullish or bearish nature. There simply isn't enough information to rely on at this point. I can, however, take it one step at a time in presenting a short and intermediate term view of AAPL. First, before the tomatoes come flying onto the stage accompanied by a symphony of jeers, a little history. I will admit to having a bias against companies like AAPL. What I mean by "companies like AAPL" is popular investments with cult like followings. These types of investments invariably end up harming investors because emotions take control of the mental cockpit as opposed to logical analysis. The emotional reaction is further reinforced by group think that is constantly amplified by positive articles, descriptions and experiences with respect to the investment. It simply becomes a recipe for bad decision making. AAPL will not be immune to this to cacophony of sheepish mental disaster. When the ship begins sinking, as it inevitably will, you will see fluffy white coats and bright pink ears scattered all throughout the investing seas. If I can supply a life vest to just one would be victim, my job is done. Over the short to intermediate term, my interest is in demonstrating to readers the risks and potential rewards in AAPL based on price analysis. As an example, in July, following a perceived disappointment in earnings with the stock trading in the 570 range, I said that it was a buying opportunity and the stock would be trading at 700+. More recently, I warned of the fact that AAPL would likely trade in the 520-550 range when the stock was trading above 600 just a few weeks ago. Now that AAPL has fallen into my downside window, the opportunity has shifted. Please click the chart below for a detailed...
WEDNESDAY WAS THE BEGINNING OF THE PROCESS THAT WILL END THE CURRENT MARKET DECLINE
140 characters doesn't serve justice to certain market situations and scenarios. We are in the middle of one of those scenarios now. In order to demonstrate my thinking appropriately, I need a bit more amplification than 140 characters allows. I made a comment on Twitter during trading hours regarding the spike in put/call ratio as the S&P 500 had a rendezvous with the trajectory from the 2009 lows. The very same trajectory that carved out the low in October of 2011 that I bought hand over fist. The identical trajectory that gave us our low in June that was brought to you in living color days before it happened by yours truly. That same trajectory that is now acting as a floor to keep the market from diving off a technical cliff. And the touch of the trajectory is occurring with a spike in pessimism. The perfect recipe. I did make a declaration on Twitter that today's low may be it for the month of November. We are now in the zone where a bottom will more than likely be taking shape over the next few weeks. It could indeed be true that the low for the remainder of 2012 occurred today. At the very least, we have started the process of ending the decline. I'll say it again, today was the first day of the beginning of the process that will end the current decline. Let's take a look at a couple of charts, with notes included, as always. The first shows you the importance of the trajectory we came a hair away from touching today. The second is a demonstration of the put/call ratio with the S&P 500 charted below it: click chart to...
FREAKY TALES
With the recent price action, it has become clear that the market is doing its best to force participants into the belief that a demon child is forming in the womb of the financial system. Moves like we experienced on Friday are meant to create a fearful environment that causes participants to either get more liquid, hedge or get short the market. There remains an excess of optimism that is inhibiting the market from moving over the substantial, historical resistance that is directly ahead of it. What Friday did was create a sense of fear in as efficient a form as possible. That efficiency came from the fact that the markets were essentially unchanged for the week. However, the levels of fear increased and the levels of optimism have decreased substantially. I am nowhere near prepared to relieve myself of the substantial burden of having a majority of the portfolio in cash. Nor am I prepared to break away from the comfortable state of being market neutral via the portfolio hedge in TZA. What I am prepared to do is acknowledge that the market are in for a period of unpredictable, choppy, doo-doo stained behavior that is going to repel traders, investors and all those in between away from the markets. Tools to avoid volatility, such as cash and hedging exposure, will continue to be the mode du jour. There is a substantial wildcard, however. The elections. More specifically, the uncertainty that can arise from not having a clear winner. And perhaps even, the surprise that can come from having an unexpected winner. This would increase general volatility. Barring a complete electoral disaster, I don't expect it to sink the market, however. This is a market that seems resolute to chop sideways for the next several weeks. Here is a technical look at the Nasdaq Composite, uncovering some interesting findings: click chart to...
3 REASONS WHY THE MARKETS ARE GOING NOWHERE FAST
While we may be coming up on an inflection point of short-term significance with respect to the markets, it is not a point where one will be justified to increase equity exposure exponentially. The legs of the market have been broken by a 300 pound thug with with a swing like Barry Bonds. It will take a considerable amount of time before the market has the wherewithal to stand on its feet, taking all comers. There are a number of factors that signal the market is not yet prepared to put the recent bearish behavior behind it, for an intermediate to long-term run at the upside: 1. Bottom pickers: If picking bottoms only leads to smelly fingers, then all of Wall Street must stink, at present. There are far too many individual and institutional investors who have become perfectly content with not looking at the potential for downside, but rather focusing on when a bounce will occur and how large its potential. This type of mindset becomes problematic especially when the markets have suffered significant technical damage in important indices such as the COMPQ, NDX and SOX. In 18 years, I have not seen a single bottom of significance take place when a majority of the focus is on capitalizing on the bounce rather than protecting from further downside. Invariably, this mindset absolutely needs to reverse before the bottom everyone seems to be waiting for can take place. 2. Technical damage: There is far too much of it across major market averages. I have outlined how we were in the process of failing at important generational trajectory points over the past few weeks. The type of technical damage we have experienced resolves in one of two ways: A. Panic to the downside resulting in high volume rinse. Capitulation, in other words. B. A prolonged sideways range that slowly causes the entrenched bulls to give up their optimism. I happen to think we will see a resolution with B over the next few months, rather than A. 3. Earnings shock: The earnings that have been reported during Q3, along with Q4 guidance are not going to support a prolonged rally until some of the variables start becoming less murky. Based on the caution expressed in nearly every conference call as of late, you can expect that October was a weak start to Q4. November will likely be just as weak until the uncertainty of what the elections mean for the United States and the world start becoming more apparent. It will likely be December before investors can accurately gauge whether the markets have become "investable" again based on available data. This sets...
HOW 1987-1992 MAY PRESENT THE HOLY GRAIL FOR THE CURRENT MARKET
This correlation study follows two crashes in relation to the exact same trajectory: 1987 and 2008. A break of the exact same trajectory point triggered both crashes. Both crashes were similar in scope. Both crashes moved right back up to the trajectory in a similar time frame. Both corrections following the rally off the lows were similar in time and price. Both rallies off the lows ended up getting pinned to the trajectory. The future potential of the current market becomes clear only when looking at the similarities of the past. Here is the study: click chart to enlarge What did the future hold for the Dow following the traumatic events of 1987, the subsequent rally back up and the seeming stalemate as prices became glued to the generational trajectory? One of the greatest bull runs of all time started some years later in 1995. Here is a look from the point at which the last chart ends: And finally, what all of this means for the future of the...
RANDOM MUSINGS OF A PROLIFIC NATURE
I haven't been doing much other than reading during the trading hours as of late. This isn't a market I have an interest in participating in for a variety of reasons that I have done my best to outline here over the past several weeks. I'm still sitting in a net neutral position, which means I don't really have to participate in the market until I lift my hedges. That is IF everything goes according to plan. Hedging is more an art than science. Chaos can and will appear when you least expect it. I have actually been increasing my exposure to WMIH this week. It is the only stock I am absolutely comfortable holding here since it has no correlation to the general averages, no business model to rely on for revenues and is essentially a shell until the board, along with Blackstone, figure out how to capitalize the company in an effort to utilize the NOLs. My research report on the company is here. The general market isn't really "investable" here. It will, more or less, be a mess of volatility for weeks, possibly months to come. It is the type of environment where the best you will be able to hope for is a tendency towards consistency of the unchanged variety. Consistent upside is virtually out of the question. Consistent downside is a significant possibility. When the best case scenario consists of hoping for an unchanged outcome, I would rather participate in cash as an investment, as I have done to a great extent in the portfolios during October. I don't think that enough attention is paid to the maintenance of emotional equilibrium for investors. Once you have been involved long enough, you will begin to discover what it is that takes you out of your equilibrium. This is, perhaps, one of the most important discoveries an investor can make, as it determines the structure of their investment philosophy going forward. There are those who will never discover this key concept, trapping themselves inside the spiked walls of purgatory within the financial markets for the remainder of their existence. There are also those who will simply ignore what they feel to the detriment of their pocketbook. You cannot be what you are not in the markets. It creates a hole that will always be susceptible to anomalous periods that will end up dissolving your strategy into acid. The goal is to have no holes. Plug them before they eat you. I was very impressed with FB earnings after the close today. You have to commend the company for so quickly adapting a mobile strategy, creating revenues that are already up...