Click chart to enlarge What better reason to believe that the market is headed lower than charts that look like this? The chart above of Citigroup (C) demonstrates just how fragile the financial sector is at the moment. The odds that Citi breaks support and heads lower are very high. We continue to believe that we'll see a full 10% correction in the market, and perhaps even 15%. This is one of the reasons we sold all of our Ultralong index positions at the end of December. We don't have any reason to believe that the market will continue to drop after completing this modest, healthy correction. We believe that Dow 9,500 (S&P500's 1020) is in line with the reality of the current health of our economy. In an ideal scenario, the market would capitulate in two or three days of massive selling, then have a strong intraday rebound after a panic selloff one morning.
If it unfolds this way, there will be value to be had across the board. We will be backing up the truck on the LED stocks, particulary CREE, which is demonstrating excellent relative strength considering what the broader market is doing. If the market does begin to peel off a few hundred points a day for a few days in a row, it will look like we're headed to Dow 6,500 again. You'll be forced to decide for yourself whether or not this is a healthy correction or another leg down in a very tiring bear market. We're sticking with the "correction" theory, but encourage everyone to do draw their own conclusions.
Please participate in our poll at the left hand side of the page. Thanks, Snot
24 comments:
I personally believe the Dow will bottom at about 9500. Don't think it will make it down to 9100, but will likely drop below 9700.
I see a funny mindset right now. Yes, investors are expecting a correction and don't want to lose any more money, but at the same time they seem to be equally scared of missing the next bull market. They're fervently searching for the right stocks for big gains and they want to be sure they're riding the right trains when they're leaving the station.
That's, of course, an over-simplification, but not too far off the mark. Now that there are a lot of new investors in the market (and a higher percentage of novice investors than ever before), the investing psychology has shifted somewhat from what it was, say, 40 years ago. It resembles more of a gambling casino than ever before and I think on average we'll see more volatility than previously. That, of course, if just my novice opinion.
DD, your "novice" opinion is dead on. Even the "pros" are novices in this game, so don't sell yourself short. Wall Street is one field where you can outperform the pros by throwing darts, so there's really nothing to becoming a "money manager". Suppose you get some sort of pin or ID card or something. Maybe a gold star. But that's all there really is to becoming a pro on Wall Street.
We once got a gold star for drawing a chicken in the second grade. That achievement trumps the lifetime contributions to society of most Wall Street pros, especially when you factor in the damage many of them do.
At any rate, we could sign on to this "next bull run" thing, but its magnitude is going to depend on two things. The first is the depth of this correction. The deeper it is, the better the next 6 months will be. Second, gas prices have to remain in check. If they skyrocket, it'll only be about 4 to 6 months later that the market hits a very rough patch which is sure to kill any running bull we may have. This may sound simplistic, but it's the amount of spending money people have that ultimately keeps this thing going.
Agreed, snotwheel. A rational thinking person could spend a year studying how the stock market works (and, of course, how people react to it) and then jump in and be a successful investor. Trouble is, there doesn't seem to be many rational thinking people around :O)
OH, BTW, congratulations on your lousy investment plan. Veeco's earnings seems to have made the LED sector giddy. You should have pulled out before the going got good. See where rational gets you. That will teach you :O) Continued success to you.
As I've previously suggested, I believe the market will behave much like it has over the past week or so. Some really nasty days and some really good days, interspersed with non-eventful days. I have to throw my hat in with those who do believe there will be some type of correction, but I think it will be limited. I believe we'll see a lot of volatility that will average out to be a mostly horizontal movement tilting more downward than up.
I'm with you, snotwheel, that I'm hoping for a real correction to take advantage of possible deals, but I don't think it will be that sever. A lot depends on how the world economies do over the next 6 months. Too much bad news will scare people into selling. A lack of bad news will keep people inactively waiting for the elusive correction. JMO. (Better go. I'm procrastinating to put off going to the gym.)
Snotwheel, are you familiar with the Marvell Technology Group, Ltd. (MRVL)? It's not exactly a pure play, but they're making a serious bid for a piece of the LED market and they are primarily into electronics that are used in LEDs. I haven't done any DD, but at a glance they look like a good company, but very expensive with a p/e of 137, though they have a quarterly earnings growth of 184%. Not bad. Just wondering if you're up on this company. Here's an article: http://finance.yahoo.com/news/Marvell-Introduces-Innovative-prnews-154235872.html?x=0&.v=2
Dd, thanks for the link, will look into Marvel later today.
Just bought another 5% in CREE at 58.5. May not have been a great entry point, but something must have happened today, as it showed renewed interest starting at around 10:00. Our average price is now 56.2. Not the best possible price lately, but at least it's under 60! This looks like a chart that could be bouncing off of its lower trendline and heading for a new high. It would be a shame for us to miss it after all this patience. We're still mostly in cash and therefore welcoming further correction, but we know that all stocks correct on their own terms and that the strongest among them will take off and make new highs LONG before the broader market recovers.
That could be it for the correction. Of course it's too early to tell yet, but the LED stocks are tired of correcting and are ready to run to new highs.
It is very possible that we will not see better prices than those we just saw over the past few weeks. Well, not before we see CREE at triple digits anyway. After seeing their performance today, there's no question they remain the leaders of this market.
Today's performance puts us in a tricky position because we're still 69% in cash. We'll have to play it by ear, as usual.
Snot, I would appreciate your thoughts on this article from a few days ago:
article
Joe, it's just another worry in a long list of worries that no one really understands. And while such enormous debt and financial irresponsibility is entirely capable of wiping out huge companies, it seems to just vaporize into thin air when it reaches the government level. There is a reason for this phenonmenon.
The one number that no one ever gives us is the one on the other side of this equation, and that's the tax levy of a nation. If it were even possible to do the math to figure out what the U.S. makes each year on all of its taxes combined, you'd see that we've got the toxic paper covered. It was only a problem at the corporate level.
DD, looks like you've found a good one! MRVL has a lot going for it... even a decent looking chart with a lot of relative strength. Where did you get the high P/E info from? Looks to us like the P/E is reasonable (about 20 or so). Unless they're dealing in something other than the dollar.
We're going to look into this one further. At first glance, it all checks out. Very promising.
A down day today for AIXG produces a major sell signal. If that happens I'd start seriously looking towards the 200ema.
MRVL has a nice 1987-ish chart going for it right now. Notice the 38% retrace?
For the broad market correction to be over, we'd have to have had strong follow through of the rally today. We're obviously not seeing that yet, which points to more downside ahead.
The LED stocks are incredibly strong relative to the market. If their bouyancy keeps up for the remainder of this market sell off, we predict that CREE will hit triple digits by the summer. Buying it anywhere in the mid to low 50's should produce a 100% gain over the next 6 months. It's too early to make that prediction until things stabilize and the panic selling is over, but the probability is high that it plays out this way.
Snotwheel, Yahoo has Marvell's p/e at 149. TDAmeritrade has them at 173. Seeking Alpha at 173. I still like the company and I'm also going to continue researching the company, but I agree with you, it looks good.
In the meantime I'm getting clobbered by my investment in General Cable due to lower guidance given during their conference call. Ouch! All the talk about the grid and that's all it remains--talk. I suppose as always we'll wait until there's a crisis with our electrical grid, billions will be lost, then we'll pay foreign firms to fix it. I'm going to the next gun show and loading up (then I'll have to learn to use the dang things).
DD, sorry to hear about General Cable. Maybe you're vision is ahead of everyone else's on that one. Hopefully it works out in time. As for MRVL, we're seeing a P/E of 20, which is in line with its approx $1 EPS.
http://finance.yahoo.com/q/ae?s=MRVL
We are going to research it further over the weekend and the odds of us buying some on Monday are better than 90%. We read that Ken Heebner has invested in it. He's brilliant when it comes to the "buy high, sell higher" growth investing model. Here's a link to the article...
http://finance.yahoo.com/news/Heebner-Looking-for-2010-indie-2746782924.html?x=0&.v=1
Snotwheel, I don't know where you get a p/e of 20 for MRVL. Their EPS for trailing 12 months is $0.11, if you use earnings from their last 4 reported quarters. Their share price is 19.39. That gives them a p/e of 176.27. According to Marvell's website (http://investor.marvell.com/phoenix.zhtml?c=120802&p=quarterlyearnings) their last reported quarter was Q3'10, diluted earnings were $0.31 per share. Q2'10 earnings = $0.09. Q1 '10 earnings = -$0.18. Q4 '09 earnings = -$0.11. So ttm earnings is $0.11. $19.39/$0.11=176.27. Now, estimates for their next quarter, which will be 4th Q 2010 is estimated to be $0.33. That will improve the p/e considerably, to 35.25, if using the current share price of $19.39 and the est is correct.
A p/e of 20 would be great, but if we use the 4th quarter earnings estimate, 35 really isn't bad, particularly when you consider the p/e of the other stocks you've invested in. Buy high, sell higher. I still think this is a worthy investment and may jump in myself. Still want to do more research.
The chart of XLF I posted a week ago still applies. I am by no means a bull, but am extremely bullish right now nonetheless. My target is the 50dma at 14.47, yielding 500% on February 14 call options (which could have been bought for as little as 10 cents last week).
Sure would have been nice to short Greece a week ago. I couldn't figure out how to do it, though. Still might work. NBG - no shares available on my broker to short. Any ideas or suggestions?
Snot, have you noticed solar stocks and CREE's performance lately? They seem to be in sync. Solars tend to go up and down more and CREE seems to be more stable. If CREE is to go up, do you think solars are a good choice as well?
Thanks.
DD, you're right about MRVL's P/E, but like you said, it's going to change very quickly when +33 replaces -11 and a possible +36 replaces -18. That's a gain of 98 cents for their EPS in just 2 quarters, assuming they can pull it off. We like the stock, and will buy a small amount of it to keep us on top of it.
Anon, you could buy EEV, short emerging markets. If Greece crashed, it would do very well. But you can't hold these Ultrashorts for too long. Their value deteriorates over time, even if you're right about the direction they should be moving in. Over time, they steadily lose value regardless of what the underlying "asset" does.
Anon, forget about solar. Two reasons... first, look at a one year chart of FSLR, SPWRA, STP or LDK. They are weaker than the market. If we had to buy a stock based solely on a single attribute, relative strength would be the one. The solar stocks do not show any relative strength. If anything, they are showing relative weakness.
Second... solar isn't there yet. They've been trying to get solar to be a legitimate source of energy for decades, but have never been able to do it. The savings simply do not justify its up front cost. It remains a "cool" novelty item, but nothing more. If that changes someday, we'll take interest. But for now, we tend to believe that people have better uses for $25,000 than installing solar panels on their roof.
In contrast, consumers are going to have no other choice than to spend $8 on LED bulbs. It's a realistic enough scenario that investors believe LED's will take off. Whether or not they actually do is irrelevant. If they don't, then by the time people figure out that LED's were a scam, we'll have sold the stocks. People figured out solar wasn't economically viable sometime in the 60's. Reversing 50 years of cynicism is going to take a herculean effort on the part of these solar company's marketing firms. It's not a good bet.
doggydaddy/ginchinchili, why is VU1 in a downward trend?
We just way overpaid for some MRVL:) A 4.5% position. Wish it were a pureplay, but you can't have everything. Its earnings growth should be literally explosive over the next year or two. Thanks DD
I'm glad you jumped in, Snotwheel. I think Marvell is an ideal growth play and will payoff for you. They're aggressive and appear to have some smart, applicable technology, technology used in some of the world's most commonplace electronics. A company developing the right products at the right time.
I haven't bought yet. You were probably smart to get in when you did. I'll probably pay a higher price for mine, but whether I do or not, I don't think the share price is going to drop much any time soon.
Good luck to you on that.
Though I always hate to see a stock I own drop, I'm not too terribly worried about General Cable. Its long term outlook is still extremely strong. It'll rebound.
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