US employment #’s were surprise- I would have expected a 20pt SPX rally… why didn’t it occur?
Answer- QE3.5 is off the table until at least the second QTR. US economy is stable- but I expect earnings season broadly will be about flat forecasts at best… as opposed to the last several earnings seasons where upside surprises and above concensus growth were projected. Retail sales in US peaked this Christmas season and margins in the sector will dissappoint. I’m marginally bullish on tech, internet and pharma, therefore avoiding shorts broadly and individual companies in Nasdq. Long positions in the aforementioned could be used to hedge short positions in other areas, in my assessment.
Commodity demand ex-agriculture is weakening and will also disappoint in the first qtr, starting with Alcoa of course. If commodities dont weaken and especially oil, inflationary presure will impose additional easing constraints on the OECD central banks and QE from any source will be extremely hard to justify. Simply put, there are no solutions for the pending crisis except time, an extended amount of time. While none of us have direct experience with the last balance sheet “recession”, known as the great depression… any sensible person must accept that the recession since 2008 is different this time… all data strongly reveals that recovery to sustainable growth will take an extended period. 2015-16 might be a probable target, world economic recovery in 2012 is of very slight probability, in my opinion.
The following chart reflects my view of the broad markets condition using annotations from DOW Theory as explaned in stockcharts.com http://stockcharts.com/school/doku.php?st=Dow+theory&id=chart_school:market_analysis:dow_theory My adaptation of DOW Theory breaks many of the original rules of confirmation, but I’m adaptive and pragmatic, the explanations that I used to annotate below, fit nicely into “my interpretation” of this last years market events.
.
Some stockcharts commentary and conclusions about DOW Theory:
The goal of Dow and Hamilton was to identify the primary trend and catch the big moves. They understood that the market was influenced by emotion and prone to over-reaction both up and down. With this in mind, they concentrated on identification and following: identify the trend and then follow the trend. The trend is in place until proved otherwise. That is when the trend will end, when it is proved otherwise.
Dow theory helps investors identify facts, not make assumptions or forecast. It can be dangerous when investors and traders begin to assume. Predicting the market is a difficult, if not impossible, game. Hamilton readily admitted that the Dow theory was not infallible. While Dow theory may be able to form the foundation for analysis, it is meant as a starting point for investors and traders to develop analysis guidelines that they are comfortable with and understand.
Reading the markets is an empirical science. As such there will be exceptions to the theorems put forth by Hamilton and Dow. They believed that success in the markets required serious study and analysis that would be fraught with successes and failures. Success is a great thing, but don’t get too smug about it. Failures, while painful, should be looked upon as learning experiences. Technical analysis is an art form and the eye grows keener with practice. Study both successes and failures with an eye to the future.
“Discovery consists of looking at the same thing as everyone else and thinking something different.” – Albert Szent-Gyorgyi
What gives my current bearish call some weight… not much! A multitude of respected analysts and traders are bearish as well, this tends to crowd the trade and add a significant level of increased difficulty. Short Euro is perfect example, the trade is so obvious and crowded… it is unlikely to be profitable for those who cannot withstand volatility and staying power is necessary. Capital best deployed elsewhere.
I made a timely call in late July just prior to the August ’11 market meltdown. I don’t recall any traders agreeing with me in late July, in fact there was some significant opposition to my viewpoints and undoubtedly some luck was involved, but I was positioned nicely to profit from the leg down that occurred. One advantage at that time was that the vast majority was positioned long and all short setups were not crowded by any measure. The lonely, hard trade many times is the best trade.
Memorialized here: http://www.shareplanner.com/photos/907mike-k/photo.html?albumid=38#photoid=283
July 24, 2011 Chart and follow up quote on July 27
“This period has multiple similarities to the summer of 2008. Cash & caution if not selected short positions are advisable IMO.
I believe we are subject to a significant broad market downturn if not a “double dip” bear market. Eurozone debt fears and US debt debate have been capturing the headlines, however the real story unfolding is that of slowing growth in major economies.”
My current viewpoint broadly speaking, is 4/1 bearish. Interpreted two ways. One- broadly the risk to the downside is far more likely than a broad market rally. Two- there are limited, but certain sectors mentioned earlier that might lend themselves as a reasonable hedge long. Agriculture plays; including DE, MON and POT, tech including APPL, AMZN and MSFT might be outperformers in the coming months. I would avoid small to mid-cap plays especially when there is any question about balance sheet quality.
Specifically I find the energy sector is crowded with longs… and oil price is propped up by Iranian market manipulations. http://www.shareplanner.com/component/content/article/85-short-setups/3947-mike-k.html
I also have a strong bear stance on tanker shipping, a sector that I study and understand well. Current short positions include SFL & OSG. Both are at significant risk of eliminating dividends and face continued shipping charter rate weakness due to the massive oversupply of tanker capacity. I continue think TSLA is an excellent short candidate, but it has a stubborn blind & fanatic following that will take time to educate.
More anecdotal thoughts I’ve accumulated:
The economic engine of the world since the great recession’s beginning has been China … the Shanghai market is mostly absent excess speculation and potential manipulation by outside forces… it is broken technically and appears to be heading much lower.http://stockcharts.com/h-sc/ui?s=$SSEC&p=D&yr=1&mn=6&dy=0&id=p53376798363&a=249981487 I’ve been trading this trend with the use of the 3x bear ETF – YANG. YANG is 3x short US traded Chinese ADR’s. These ADR’s are highly inflated because of the US market strength- they simply do not reflect the softness in the Chinese economy. Initiated new position at the close of trading on Friday.
More of a long term trading view :Some fundamental analysis using Q ratio displayed in chart form … www.businessinsider.com these statistics suggest that the market bubble has yet to burst… I contend that the stimulus efforts worldwide with Bernankes QE attempts temporarily kept some air in the bubble
http://www.businessinsider.com/the-stock-market-is-still-41-to-52-overvalued-2011-10
… I have numerous other analyses supporting the bear case… but this blog is getting too long
I recommend taking profits in long positions and weighting short incrementally on any strength, especially on the recent Santa Clause – New years opening strength.. Key near term timelines and metrics to follow : There is a key test next week when Spain and Italy issue new bonds & the (certain) S&P credit rating downgrade of France also is imminent.. Each event will disappoint and the sovereign debt spiral worsens absent a massive ECB intervention, which is not legally possible. If I were to use a singular metric, it would be the 10yr Italian yield, if over 6.80% all my short positions remain in place, if yield rises above 7.30%, world finances are serious jeopardy and I will risk substantially overweight short. Be shrewd and frugal K-Mart shoppers. (K-Mart may be another discussion one day… Kelly Criterion and Martingale Systems)
I am a serious market researcher and one of the things I have noticed is that most market behavior is biased long and memories are amazingly short. The long bias is obvious and has manifold underpinnings. Many traders/ investors fall in “love” with a recent winner or relatively narrow range of stocks. The love affair usually ends badly. Many investors are “trapped” into beleiving the latest bullish spin propegated by sell siders and long only fund managers. Rotation between sectors and a potential to sell /short equity must be in a successful traders tool box. Even if the long biased trader who meets or exceeds their initial expectation many refuse to sell and move on, at least initially, many stay “married” until most if not all profits errode away. The long bias is quite natural, we humans are possessive and generally optimistic by nature. This advantages the well informed bears. I’m not intending to insult those who hold long positions, I hold long term long positions as well, it is not that I like or dislike their stock selections… and I vigorously applaud their winners to this moment in time, however my personal conviction is that the current markets are at greatest probability to move substantially lower as opposed to the risk of any significant move higher.
Trading profitably over time is extremely difficult, the largest roadblock is the bias to be consistantly long equities, positioned long today is far greater risk than reward, IMO, although holding long for the next decade is almost ceratain to be profitable… the Buffet model for trading succesfully.
Many of you are probably thinking that these thoughts & examples are overly complex or perhaps an irrelavent exercise and divorced from most effective analyses used by traders on this site. However, the fact remains that cognitive traps and countless other baises (http://www.investopedia.com/terms/c/cognitive-dissonance.asp#axzz1ihfqOp1J ) make us unwittingly prone to misunderstandings of risk & probability and will undoubtedly lead to costly if not irrational decisions when trading.
The ability to discipline ourselves to trade both long and short over a broad range of securities using research (both fundamental & technical) of actual probabilities as opposed to “instinctively biased” trading on perceived risk & probability is an essential tool if we are to trade actively & profitably over time.
Just thinking.. … a little louder…. and probably too much
Good Fortunes
Mike K
