Click image to enlargeSorry for the brief hiatus, hope everyone checked in at least 3 times a day in our absence!
Back when Merrill, Lehman and Bear Stearns collapsed, we spoke to the CEO of a company which was hired to figure out what went wrong. We ask many people where they think the market "should" be. For some reason, his answer stood out... "on both sides of 11,000, but it will keep coming back to that number for years to come."
We've felt the same way for a long time now. There's no reason for the market to be as high as it was before the crash. Sentiment is nowhere near that level of euphoria. Nor is the economy. So that rules out us being able to sustain anything in the 13,000 to 14,000 range. Nor should we be at 8,000. We belong at 11,000. Maybe 11,500.
For anyone that's followed the basic teachings of this blog, the chart above shows three reasons why one would be lightening up on shares in the near future. The market is
1.) At the top of a trend channel, far from its moving average
2.) Near a very significant resistance level
3.) Blowing off at the top of an S-curve
Sure, it could go higher, and it probably will. But now would be a good time to be 80% in cash.
If someone were to buy into any one of the indexes on Monday, it's extremely likely that they will be back to break even in a few months time.
Without knowing what path the market will take to get back to Dow 12,700 in 3 months, we just take the easy route and let it tell us. We're 86% in cash. If it goes higher, it's a no-brainer short and hold. If it drops, we scale in. There's no need to predict anything. Well, anything other than that we're in dangerous territory now.
27 comments:
We're selling the remainder of our SPY this coming week. From there, if the market rallies, we're going to scale into SDS on the way up. If it drops, we'll repurchase SPY at a discount to our selling price.
Welcome back after your "brief" (wink, wink, nudge, nudge) hiatus. I am 26% cash, 4% equities, 7% convertibles (but trying to sell them), and 63% bonds. I have been selling off my equities as the market has been coming up in this nice little rally. I agree with your reading of the chart and the chart reflects the news, the economy, and the sentiment. The low volume is significant, in my opinion. Instead of holding so much cash, though, I am holding lots of bonds so that I can try to build some dividends. My gains in 2011 were almost all from dividends and 2011 was a sideways year.
BTW, you will be glad you didn't buy into VU1 when it was being pumped by Ginchinchili. It has gone through a reverse split, start-up problems, etc. and it is down about 60%. It is at a tipping point right now where it will probably either make it in the next year or disappear.
Snot, what going long VXX and/or buying VIX options. If going the option route what's the optimal strike and expiration to buy?
This market is shrugging off bad news once again. It wants to rally, since the FED has its back. You can't fight the FED, because their checkbook is bigger than yours.
Hello.
Yawn!
http://stockcharts.com/h-sc/ui?s=SPY&p=D&b=5&g=0&id=p12890782518
Market just does not want to correct. No dips for people to buy in. Someone like Snot who is almost all cash just sits on the side and watches others draw dividends or make money, even if slowly in tiny chunks. Frustrating market. P/E levels of many stocks are good. One expert after another appears on CNBC to remind us of fundamentals that many stocks are cheap. Looking at them over the last 10 or 12 years, they have doubled or tripled in earnings, but they are not much more expensive them they were then. I'm staying in the market, but with lots of non-treasury bonds and my stocks are either dividend paying stocks or defensives. My portfolio keeps going up. I sleep well at night. On the little 1/2 % point down days, I'm down less. On 1/2% up days, I'm up less, unless a dividend arrives. What else should one do. I'm not going to sit and hold cash. The FED has already hinted that it will raise rates, maybe sooner than 2014. Inflation will get us eventually, so I'm starting to buy TIPs on any dip in them.
The Dow and the S&P are holding up, but look at a chart of the Nasdaq. It has broken down below its early April lows. The Nasdaq may be the canary in the coal mine, giving us an early indication of the technical weakness in a great number of individual stocks that will soon weigh down the indexes.
Or look at relative performance. Nasdaq is heavily dependent on AAPL and AAPL has been soaring like an eagle. Maybe it is some healthy profit taking and the Nasdaq is going to come back a little bit more in line with the DOW and the S&P. A 10% difference between the indexes had developed. It wouldn't take a rocket scientist to figure out that a gap like that would likely narrow.
http://finance.yahoo.com/q/ta?t=1y&s=QQQ&l=on&z=l&q=l&c=dia%2Cspy&ql=1
AAPL up well over 7% in afterhours on NEWS -- even though Snot says news doesn't matter. We'll see how the Nasdaq does tomorrow.
Company specific news matters to individual stocks. It's the "broad market" news that we believe is factored in long before it gets reported as news.
"So that rules out us being able to sustain anything in the 13,000 to 14,000 range." We continue to flit up and down around the 14,000 line which is 1200 points or 9.4% above the resistance line of your chart. If we correct a normal correction (10%) from this point, we will merely be back to the point where you said it was dangerous territory. Is it time to revise your bollinger bands upward by a considerable amount like 15% or 20%?
excellent article
Excellent article. He awaits the news before making his major move. He knows the chart can't predict. The chart is past history. And news can affect more than a single company. The chart does tell him this could be a critical point, however.
News out of Europe -- Spain, Greece -- and news out of China affecting the whole market, not just one company. Imagine that.
This "news" from overseas was known long before the market started its recent correction... just not by us. It's not news, it's an excuse as to why the market is weak. Meanwhile, we knew it would be weak before the "news" broke. Hence the SDS.
How did we predict the news if the chart only shows past history?
Yes, the news has been known for some time and the market has been reacting to it each time a new story breaks. And today horrible jobs numbers are reported and the whole market tanks. Hello.
The jobs numbers are not news either. They are known about 3 months before they are reported. Kind of like earnings, but with a bit less UPOD corruption
If they are known 3 months before they are reported, why don't futures swing strongly one way or the other and some powerful people who know those numbers get rich by the quick swing from numbers that miss expectations like last Friday? Your claims simply do not fit the data. Sorry Snot. Why don't you start announcing the job numbers just 1 month ahead of time on your blog so all your readers can make a killing. :)
And from the front page of Yahoo "news" we read, "For the second-straight day, financial markets hung in limbo, awaiting word of some grand pronouncement out of Europe." But I guess that is a delusion from a professional financial writer who is clueless, because he thinks news might actually matter.
Who says "powerful people" didn't make money off knowing the jobs numbers ahead of time? They could have bought futures days/weeks/months before their release and simply waited until last Friday to dump them and "get rich".
Snot,
Any worries about holding SDS this long due to it's gradual price deterioriation over time?
Anon, professional financial writers are writers because they cannot make a living trading stocks. "Another Anonymous" understands how the market works. Billions were made off of the jobs numbers pump and dump.
Ruby, yes it's always a concern holding a deteriorating asset. We're up a point on it, so there's some room to breathe. What allows us to hold onto it for so long without stress is that we know the market can't sustain anything around 13,000 for too long. If you think of it, really, where's it gonna go? The odds still favor the downside. If you look at how these inverse index ETF's move, you can be underwater on them for months, and then make a killing in a couple days time. They are a great hedge for bulls in that respect. We risk some gradual price deterioration, but meanwhile we're poised to make a nice profit
very quickly if the "powers that be" decide to move the market lower to create the volatility they need to keep the profits rolling in. They'll probably wait to do it until there's enough of a news story to make it a believable move. Like the story about the mortgages... that one was worth 8,000 Dow points even though the market miraculously repaired itself in no time, all things considered.
...the Asian Contagian was a good one, too. Worth a lot to many pros. I think all we're missing from the Euro crisis is a catchy name. Oh, wait, didn't we do this before? Does "my big fat Greek correction" ring a bell? Why can't they come up with new excuses for volatility instead of dusting off old ones and recycling them? Or have we just been at this long enough to earn the distinction of remembering the past couple hundred of them?
You have become nothing more than a sour conspiracy theorist. Has your investment portfolio really gone that poorly?
how to play the market
We're just using the market rallies to add to our SDS position. Anything in the low $15's seems like a steal considering the market has no real sustainable upside from here.
Granted it's an election year, but there's a reason some states have their highest unemployment rates in their history.
It's that we're paying more taxes than ever before. We have a few wars to pay for, and a few bailouts. To top it all off, we have a Democrat in office, which means money is being stolen from the ambitious to provide for the lazy. Who really wants to work under these conditions? Apparently no one in Florida does (unemployment at 21%).
Reagan is rolling over in his grave right now. A little "trickle down" is exactly what this economy needs right now. If the ambitious aren't motivated, then there are no jobs being created for the lazy.
We'll see upside in the market when they fix the tax code to incentivize the ambitious to get back to work. The only reason the market isn't tanking right now is because somehow oil has managed to not skyrocket for the first summer in years.
Anyhoo, it's a great time to be loading up on inverse ETF's each time the market rallies. It's only a matter of time before the inequalities of the tax structure are reflected in corporate profits.
How comical this blog is many years later, reading the pontifical posturing of the real estate agent Snotwheel, as he pretends to be a wise, prophetic soothsayer of the stock market.
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