THIS SENTIMENT INDICATOR IS A BEAR’S WORST NIGHTMARE
History rhymes and so do bull markets. The 90s bull offers the astute investor a grab-bag of tidily wrapped treats for the taking. The treats come in the form of snippets of information that hint to us what to expect from a technology led bull market that is doubted, lambasted and scoffed at for most of the way up. With this in mind, I present quite possibly the only sentiment indicator that should be in the toolbox of an investor: The put/call ratio. What you see below is a moving average only version of the put/call going back nearly 20 years. You will immediately notice that we have not even started to dent the skeptic sentiment that marks important tops for secular bull markets. Instead put buyers remain resilient in their conviction that every 5% pullback will turn into a 25% pullback. A bear market will emerge. The skeptics will fly high above the city merrily cheering as the optimists are herded back into their lives of perpetual peasantry. The chart below flys in the face of this type of thinking while telling us exactly why the pullbacks are so short lived. In three words: Too many bears. click chart to enlarge...
WHY IMMEDIATE LIQUIDITY IS THE GREATEST CURSE TO EQUITY INVESTORS
Imagine for a second that the real estate market in the U.S. was as liquid as the stock market. That home prices for every single residence in the country traded on an exchange that could be accessed each business day. Imagine that selling your home was as simple as clicking "sell" and you would have a predetermined amount of time to move out. Actually, let's make it even easier than that. Let's say as part of this real estate liquidity program, within 24 hours of selling your home on the real estate exchange, movers automatically show up, pack your belongings and send you off. Now let's assume the opposite were true for company stock. Imagine that stocks took months to sell. There was a tremendous amount of paperwork involved. The value of your stock wasn't quoted daily. If you wanted to sell your stock, you had to physically move a portion of the furniture, equipment or machinery at the company to another location. In other words, there was a tremendous amount of work and inconvenience involved. How would this reshape the ability to produce profits in both of these assets? Investors I have met over the past 20 years have managed to produce tremendous profits in real estate, while very few have held onto their profits in the financial markets. Is this because the stock market is difficult? Is the stock market rigged, as some would have you believe? Has this been an adverse period for stocks? Is there something about real estate that makes it more steady and simple for the average investor? Accessibility is the at the root of the answer to the question of why individuals fail at stock speculation at a much greater rate than real estate speculation. The fact that the stock market is quoted on a daily basis allows for emotions to get involved. Further, the ease with which you can move millions of dollars, allows for emotions to be acted upon in a feverish manner, avoiding deliberate, careful judgement while embracing fear and uncertainty. For the average investor, real estate doesn't allow for emotions to get involved. In fact, it plays into the human tendency towards laziness given that selling a property involves both time and effort. And this is why investors, for the most part, are much more successful in buying and holding real estate than they are with stocks. In the real estate market, individuals are being rewarded for human traits that come naturally. In the stock market, individuals are punished for human traits that come naturally. The individual investor in the equity markets is being manipulated on a daily...
THE EMOTIONLESS, MISUNDERSTOOD PRESENT DAY BULL MARKET
A majority of the investment population, both professional and otherwise, continue to not understand this market. The proof is in the performance of investors over the past several years along with reactions to extremely standard events like the October pullback. Short of cramming equity issues forcefully down investors throat, I was as clear and adamant as I have ever been that October was a substantial buying opportunity, one of the most substantial of this bull market, in fact. One of the most widely read articles I have ever written on this site called for new highs to be seen in the popular market averages by year end when bearish sentiment was at its extreme in mid-October, with anonymous bloggers of false reputation being quoted by Business Insider as calling for continued severe price declines. Little did I know that new highs would be seen before months end, in what turned out to be one of the swiftest recoveries from a correction in decades. Nobody expected it. Still, to this day, there are few that see what is going on. And what is going on is as powerful a bull market as any of us will experience. Those who were around in the 90s and truly digested the various nuances surrounding the bull will grasp what is at hand here. In fact, as has been discussed numerous times this year, we are very much on path for a 90s type continuation of the bull that puts up numbers in the major averages that few expect. Witness: oil is crashing, metals are done, Fed Funds rate is set to rise, long-term rates remain low, mom&pop are absent from this bull market and far from returning, technology innovation is fueling the U.S. economy, investors are realizing that emerging markets can't compete with U.S. assets, the Dollar is king, the recession is still fresh in the mind of investors causing adverse bearish reactions at the first sign of trouble. Interesting? Good, I'm talking about 1995, which was not even the mid-point of the bull market. We are very much replicating that environment now. There is no reason not to expect extraordinary growth in equities going forward based on the duplicative nature of price, fundamentals and time. The growing banter about valuations etc. is grossly early and horrendously useless. It is misleading to those who simply do not know better. Markets don't top on valuations, but rather emotions. Emotion has invariably been present at every major market top. I was there in March of 2000 when I had distant relatives calling me telling me how much they have made in QCOM. I was there when...
IN THE THICK OF IT
Sometimes you just know. You know that the decisions you make during a predefined, limited window in time have reverberations far exceeding similar windows in different time periods. You know that opportunity is breathing down your neck and the culmination of all your experience is needed for it to be seized. You know that the opportunity for significant profit exists that can propel rates of return for years to come. This happens to be one of those periods. In the small and especially micro-cap world, the market of 2014 has created a dislocation between price and reality. The intangible factors that go into investment decision making are being completely overlooked in favor of only the most obvious, textured type of information that can be easily understood and interpreted. The more complicated the situation, involving abstract, multi-faceted outcomes that cannot be easily interpreted utilizing stale modeling forecasts, the more the chances are that the stock is severely depressed. There simply isn't a whole of interest. There isn't interest in digging for information. There isn't a desire for risk in the form of emerging companies. And the interest that exists is from those who are looking to trim the books into year end for cosmetic or perhaps, tax purposes. The propensity towards rotation has been obvious for most of this year. 2014 has been the year of the large-cap. Even more pointedly, it has been the year of the favorite large caps. It has been an extremely narrow run to the upside, with old school favorites like AAPL and BAC leading the upside. The market has been very comfortable with leaving some key names behind. It has certainly been comfortable with leaving a majority of small-cap names behind. The Russell being basically flat for the year doesn't begin to describe the pain being felt, mostly in the form of frustration, by a majority of small-cap investors. Just as the rotation favored large cap names in 2014. The money will rotate back into small-cap names in the years ahead. I published a study a couple of months back that showed what the Russell 2000 does following both down years and years where the S&P is up while the Russell is lackluster in nature. The results showed a definite propensity towards significant outperformance in the year that followed either the down or lackluster relative year in the Russell. The outperformance in most years was double digit in nature for the Russell following such an event. I expect that 2015 will yield a similar result. I've been spending all of November checking, rechecking and once more checking my work. I have been scavenging the detritus for...
CLIENT LETTER: AN IMPORTANT MARKET BOTTOM & THE TRUTH ABOUT TIGHTENING LIQUIDITY
What follows is a section from the “Looking Ahead” portion of my monthly letter to investors at T11. In order to look forward with any sensible appreciation for what is going to occur, let's look back at an excerpt from last month's “Looking Ahead.” We are presently in the midst of the aforementioned “reset.” One of the fortunate features of any bull market is its ability to swiftly move through periods of bearish adjustment. I don’t assume that this adjustment will move past mid-November. However, during that time the damage on the downside could be fairly extensive (5%+) for the major averages. At its worst during October, the S&P was down 7.71% for the month. This swift period of downward adjustment came to an abrupt end on October 15th, with what is likely to be a significant low for all major averages. In fact, according to the evidence presented by the market, the low that was created in October is as important as the October 2011 and March 2009 lows. Let's look at the evidence: 1. The short-term moving averages for the combined put/call ratio hit levels not seen in more than two years, signaling an extreme bearish stance by market participants during the beginning to mid-October. On October 13th, two days from the ultimate low, the CBOE combined put/call hit 1.53 to close the day. This was the highest recorded close on the put/call in more than four years, signaling an extraordinary amount of put buying among market participants. 2. The Russell 2000 of 2014 has a very significant correlation with the Russell 2000 of 1994. I outlined this correlation in an article on Zenolytics. The chart can be found by clicking here. In 1994 the max downside for the year in the Russell occurred in Q4 with a decline of 9.55%. In 2014, the max downside for the year in the Russell has been 10.58%. Both 1994 and 2014 were preceded by multiple years of significant gains in the Russell. In other words, they turned out to be periods of digestion within a larger run for the average. Following the digestion period in 1994, the Russell went onto gain nearly 30% in 1995. I expect 2015 gains to be similar in nature. 3.We have now experienced a 10% correction in the S&P. This qualifies as a “reset” of the bull market. Especially in the face of the fear it created during mid-October. Resets of this type are significant events, preparing the markets for their next cycle up. For examples look no further than the 1990s bull market that was filled with short-term violent resets that threw investors off...
5 CHARTS THAT WILL HAVE YOU SAILING THROUGH THE DREADFUL LEMON SKY IN THE WEEKS AHEAD
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PORTFOLIO UPDATE: IT’S ALL IN THE DETAILS
On Monday, I tweeted the following: SGGH is Signature Group, which was an NOL shell, with approximately $900 million in NOLs. The NOL part is great, but it's not the reason I bought into the company here. On Friday, the company announced their first acquisition, paying $525 million for the world's largest independent aluminum recycler. Before getting into the micro view of the SGGH, let's talk about the timing of this announcement. I don't think they could have timed the announcement of the acquisition at a worse time for fetching any kind of premium or gaining any kind of new interest from investors. In other words, the 20%+ reaction on the first day that has now been reduced to about a 10% upside premium for the shares post-announcement does not reflect the new reality, capabilities or potential for this company going forward. The market of Q3 and Q4 2014 is incapable of factoring in premiums to anything with a market cap below $500 million. Invariably, a pessimistic view has been given to small companies unless they present clear, straightforward data that requires very little in the way of analytic interpretation. This is what occurs during negative cycles in the micro/small-cap space. Nobody cares. And that is exactly where the opportunity for 200, 300, 500 or even 1000 percent upside in names resides. The simple act of Wall Street being in a drunken, depressive malaise that creates a black hole for proper pricing of tangible, positive fundamental changes in these companies is where the opportunity lies. So let's look at SGGH and the new form they have taken with this acquisition: First point: Recycled aluminum is a growth industry not because individuals are going to be increasing their consumption of Dr. Pepper, but rather, automobile manufacturers are being held to a higher standard of fuel efficiency. As such, they need a lighter material that doesn't compromise strength or safety. Tesla uses aluminum frames. The new Ford F-150 is the first Ford model to use an aluminum frame. Toyota is increasing use of aluminum in their automobiles. You get the picture. It is a sustainable trend in automobile manufacturing. Recycled aluminum is preferred as aluminum can be recycled without compromising quality. There is no need to have "virgin" material. Aluminum sheet deliveries to auto makers are forecast to rise from 504 million pounds in 2014 to 2.7 billion pounds by 2018. Second point: SGGH is paying $525 million for a company with approximately $75 million in EBITDA in 2014. The high point of their EBITDA was $105 million in 2011 on revenues of approximately $1.6 billion. This...
HERE IS THE SUPPORT LEVEL THAT MATTERS MOST FOR THE MARKET GOING FORWARD
In my continuing lust for a market that has become increasingly plague ridden according to popular perception, I would like to present the following chart showing a key level of support that the market responded to in a dignified manner during today's trading. This dignified response to such an important area of support is yet another clue, in addition to recent small-cap outperformance, that the undercurrent of the market is bullish in its intent. Not many people can see it in the midst of the noise. But that is what bottoms are made of. In the chart below, I reference this article from exactly one year ago today titled "The Resistance Level That Matters The Most For The Bullish Case Going Forward." The resistance level of exactly a year ago is the support level of present day. The market is a poet. click chart to...
HERE IS WHY THE S&P HITS NEW HIGHS BY YEAR END
You know the market has hurt investors when the analysis becomes a plethora of "maybes," "coulds," and "should bes." The days of putting yourself out there for all to see has been replaced with putting yourself out there to make sure you aren't humiliated by being wrong. I don't believe in such timidity in analysis. With that said, I will offer the following proclamation: The markets will end 2014 at new highs after making a low in October. I base this on two pieces of analysis that nobody is talking about: 1. The 200 day moving average being broken for the first time in something like 500 trading days. This is a record. It's a tremendous record, in fact. The record should end this week as the S&P is an inch away from breaking the 200 day MA to the downside. First, let's talk about what the record signifies. The fact that persistence on the bid for the markets has been so relentless to not allow the S&P a decent pullback for nearly 500 days is NOT bearish. It is a testament to the strength of this bull market. Strength that will not subside from the first "real" pullback of this bull market. That bid will return with the force of a million bearded dwarfs into the seasonally favorable period of November-December. Let's look at past data dating back to 1990 with respect to previous "record" runs above the 200 day MA: A. The second longest run after the present one was from 1995-1996. The break of the 200 day MA took place in July. Just a couple months later the S&P was 10% higher. A couple years later it was close to 100% higher. B. The 3rd and 4th longest runs took place in the 50s and 60s. Too far back to have any relevance. However, the fifth longest run took place from Oct 92-Mar 94. After the S&P 500 broke its 200 day MA in March 1994 it declined by roughly 5%. That was the low...for the decade. C. The 7th longest run took place from Aug 96 - Oct 97. The break of the 200 day MA was a one day event here. 6 months later the S&P was higher by 30%. 2. Speaking of 1994, there is an interesting correlation occurring in the Russell with respect to that year. See chart below: click chart to enlarge There are other reasons, as well. Such as leadership, earnings, interest rates, the Dollar, oil prices, valuations etc. But I want to keep this focused. Those speaking of...
4 CHARTS THAT WILL RESCUE YOU FROM THE JAWS OF MEDIOCRITY IN THE WEEK AHEAD
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