Markets look like they want to extend. Albeit in a very fractured manner and on very low volume. I had expected quite an expansion in volume this week. It hasn't arrived.
Many bearish commentators are looking for a 'catalyst' in order to get stocks moving lower again. This is backward. There are catalysts every day. Yesterday's consumer credit numbers were terrible (good for consumers, but bad for a credit based economy.) International capital requirement standards have been making the rounds as well - in conjunction with IASB and FASB accounting changes for banks. Trade tensions have been heating up between China and western nations.
The difference between these 'catalysts' and the ones being talked about by "the bears" is nothing more than market reaction. A catalyst is only catalytic if the market reacts to it. Otherwise it is ignored. Hence it is not the catalysts we need to be watching for. Only the reactions.
Nobody in their right mind would even attempt to justify weighting a 10,000 person difference in weekly unemployment claims higher on a scale of importance than a $20 Billion dollar drop in monthly consumer credit figures. But if the market is higher after the release of such information, you can bet your bottom dollar that the financial news media will credit the former as cause for the rally.
Social mood is at euphoric highs if one were solely focused on the financial world. But pessimism abounds on Main Street. This can be seen in presidential approval ratings, assessments of the current job market, and consumer confidence. Bulls will point to this as fuel for a continuation rally, as they claim these retail investors are "underinvested" in equities. Such claims are, of course, way off base. They are made simply by looking at historical participation rates, noticing that they are below the upward trend of the past 30 years and suggesting they must move higher. This does not take into account that perhaps retail investors are not buying stocks because they've decided their rate of saving has been way too low for over a decade. Perhaps they've decided that paying over 10% of their incomes for debt servicing costs is too much for them, and they'd rather pay back the debt than attempt to outpace it with gains in the stock market. Perhaps these retail investors see the growing federal debt and sensing a higher future rate of taxation, they are setting aside cash for such an inevitability.
Optimism may reign on Wall Street, but I don't think Main Street will play "catch up" anytime soon - as most analysts are expecting. But I would warn readers not to underestimate the potential of Wall Street euphoria to continue even longer than most would rationally expect. Remember back to the late 90s. Most respected market analysts had correctly identified the Nasdaq bubble as such in the lead up to the Asian Financial Crisis. The Naz managed to double from those levels. China did the same between the spring and autumn of '07. Most of those who were correct about the '07 US market top were also those who had called the entire advance from '03 "illegitimate." It took them 4 years to be proven correct. How many would have told you that there was even the slightest possibility of a multi-year rally if asked in early '03?
That said, this market looks toppy, sloppy and choppy. A perfect recipe for a top - or a failed retest of resistance leading to new highs. Is the mood ready to shift on Wall St?
"The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function. One should, for example, be able to see that things are hopeless yet be determined to make them otherwise." -- F. Scott Fitzgerald
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
Thursday, September 10, 2009
Monday, September 7, 2009
Technical Update 34.09
I hope everyone is refreshed from their long-weekends. The coming week is likely to be one of high importance in determining if the recent peak at 1039 was in fact a lasting market top or just a speed bump.
Last week, I outlined that "the probabilities have materially shifted in favour of a lasting market top." Tuesday's market action provided further confirmation to this, registering a 90% down day. The remainder of the week was characterized by very low volume, declining volatility and moderately higher prices, achieving a 50% retracement of the down move. I am skeptical of the legitimacy of the move as it was on such low volume going into a holiday. However, price is the final arbiter.
In Elliott terms, this looks to be a 2nd wave of some degree, which means that it can retrace all the way back to the high - but no further. Any push past the August 28th high would be very bullish and suggestive of a price target in the 1100 area. But since market action is likely to be of very high volume from Tuesday onward, any push higher that proves it can hold will be enough to turn me more bullish for a trade.
Below is an hourly chart of the last month for the S&P 500. The horizontal lines are common fibonacci retracement levels for wave 2 moves.
98 NYSE issues managed to make new 52week highs on Friday. Along with a fairly solid closing TICKS reading and strong breadth, this throws a bit of a wrench in the plans for a bear raid.
The big story of the week was the sharp move higher in gold, busting out of a triangle pattern and challenging the $1000 mark once again. Readers will find it interesting that gold managed to do this both with higher US Treasury prices and without much of a move in the US Dollar. The internet is filled with theories as to "why" this is happening and "what gold knows" that other asset classes apparently don't. I think Dennis Gartman put it best in an interview I saw with him last week sometime, when he said (paraphrased) 'Gold isn't moving in reaction to anything. It's just moving. It is a market unto itself and right now it looks like it wants to go higher.' That is a simplicity I can agree with.
The aforementioned US Dollar Index appears to have failed in its breakout attempt and looks destined to make new YTD lows before putting in a bottom. This is obviously important to the direction of equities, so it bears keeping in mind.
That's all for now.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
Last week, I outlined that "the probabilities have materially shifted in favour of a lasting market top." Tuesday's market action provided further confirmation to this, registering a 90% down day. The remainder of the week was characterized by very low volume, declining volatility and moderately higher prices, achieving a 50% retracement of the down move. I am skeptical of the legitimacy of the move as it was on such low volume going into a holiday. However, price is the final arbiter.
In Elliott terms, this looks to be a 2nd wave of some degree, which means that it can retrace all the way back to the high - but no further. Any push past the August 28th high would be very bullish and suggestive of a price target in the 1100 area. But since market action is likely to be of very high volume from Tuesday onward, any push higher that proves it can hold will be enough to turn me more bullish for a trade.
Below is an hourly chart of the last month for the S&P 500. The horizontal lines are common fibonacci retracement levels for wave 2 moves.
98 NYSE issues managed to make new 52week highs on Friday. Along with a fairly solid closing TICKS reading and strong breadth, this throws a bit of a wrench in the plans for a bear raid.
The big story of the week was the sharp move higher in gold, busting out of a triangle pattern and challenging the $1000 mark once again. Readers will find it interesting that gold managed to do this both with higher US Treasury prices and without much of a move in the US Dollar. The internet is filled with theories as to "why" this is happening and "what gold knows" that other asset classes apparently don't. I think Dennis Gartman put it best in an interview I saw with him last week sometime, when he said (paraphrased) 'Gold isn't moving in reaction to anything. It's just moving. It is a market unto itself and right now it looks like it wants to go higher.' That is a simplicity I can agree with.
The aforementioned US Dollar Index appears to have failed in its breakout attempt and looks destined to make new YTD lows before putting in a bottom. This is obviously important to the direction of equities, so it bears keeping in mind.
That's all for now.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
Tuesday, September 1, 2009
Reader Mailbag: Why Such A Focus?
Reader TH asks a very relevant question with regards to the focus of my attention over the past year or so.
Paraphrased, TH wanted to know why I spend so much time deliberating over the potential forces of inflation and deflation rather than focusing my attention of some of the more prospective new technologies and investment opportunities of the future. He contends that there are opportunities to make money in any market environment and wonders if my time would be better spent searching for those, as opposed to trying to "predict the future actions of madmen."
TH raises some very good points here. Indeed, there are many new technologies that I am very positive on. Nanotech would probably be at the forefront of this. There are unlimited applications for a technology that literally allows one to rearrange the building blocks of life (molecules) to conform to one's needs. This is not a new concept. But the underlying technologies have become much cheaper than the two previous speculative booms that the sector enjoyed (and then suffered through) in 2000 and 2004. Very much like the concept of the computer was posed decades before it became a useful tool, in time nanotech will gradually begin to make waves on our lives and economy. The companies that are able to be at the forefront of this will likely become some of the better investments of the next few decades.
Additionally, I still believe there are advancements to come in communications and networking. The recent introduction of "smart phones" is probably the most notable manifestation of this. Network speeds and accessibility are enjoying exponential growth. With it, they are redefining what people are able to do "away from the office." Often seen as a gimmick for text messaging friends and other social networking time-wasters, the open source nature of these things are enabling people to do away with numerous other burdensome tools and making us more productive in the process.
Another area that I see new and exciting growth opportunities are in so-called "new media." I am already invested heavily in this industry - via this blog. I don't think anyone can honestly say what the next medium will be for the transmission of news media, entertainment, or advertising. But it is apparent that it will be far more customizable and "on demand" than previous versions. There will be little bubbles along the way - for the life of me, I can't figure out what draws people to Twitter. And yes, I'm aware of the irony that blogging is itself a potential bubble.
So back to the original question from my reader TH. Why don't I spend more time talking about this kind of stuff?
The short answer is because even though I want to be invested in these technologies, I firmly believe I can do so at a fraction of the price in 2-5 years down the road. And this belief is best conveyed with an understanding of our current deflationary situation. If it were inflation that I saw in the near or intermediate future, I wouldn't care much for valuations or balance sheets. I would be buying assets on margin in expectation of their imminent explosive growth.
As I began my research into financial markets, the first area of interest for me was in understanding the history of markets. I suppose it would have been easier if I became enamored with the impressive growth of homebuilding stocks, but that seemed all too short term and frivolous to me. I was after the big picture. The more I began to research this, the more it became clear to me that successful investing rarely had much to do with picking stocks. Rather, it had more to do with making the right decisions in asset allocation once every 10-20 years. That's all that seemed to matter.
Think about it this way. Among those who were entering midlife in the late 60's/early 70's, how many managed to fully benefit by buying real estate and commodities with borrowed money at a low fixed rate of interest? And later on in the 70's how many had the acumen to sell those assets and buy stocks? And in 1999, at the height of the tech bubble, who in their right mind would sell everything and buy government bonds - and hold them for a decade?
The answer to all those questions is "not many." However, anyone who did make even one of those decisions was likely made very wealthy for the remainder of their lives. Any further decisions would have been irrelevant to their overall financial standing. For anyone else, the likely outcome was breaking even at best, bankruptcy at worst. Even those that managed to pick the best stocks through the 70's lost out to inflation. Those that held real estate into the early 80's were eventually forced to refinance debt at interest rates of 20%.
It is my contention that the environment for owning companies is poor, as it has been for 10 years. I could attempt to pick the best among the industries that I mentioned above. If I happen to be wrong - or early - I lose. Take Juniper Networks (JNPR) as an example. I like this company. They provide networking solutions for many of the new technologies I talked about above. They don't have as much risk as the underlying technologies because they simply service the needs of other companies. But they are trading at 22x their forward projected earnings and pay no dividend. Twenty two times! Of course those projected earnings could be affected by exogenous risk factors that have nothing to do with the company itself. How can I buy this with a 10 year horizon if I think there is a realistic possibility of it dropping 60%? I encounter the same conundrum in nearly every business that I feel has good growth prospects.
So we come back to the question at hand. Inflation or deflation. If it's inflation, I hold my nose and buy 'em. If it's deflation, I remain patient and wait for that 60% correction or more - yes even from these levels. It is a binary outcome. Hence, the focus of my blog and my attention is in determining this outcome.
Managing this will prove to be the single most important determinant of the future financial health of myself and my readers.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
Paraphrased, TH wanted to know why I spend so much time deliberating over the potential forces of inflation and deflation rather than focusing my attention of some of the more prospective new technologies and investment opportunities of the future. He contends that there are opportunities to make money in any market environment and wonders if my time would be better spent searching for those, as opposed to trying to "predict the future actions of madmen."
TH raises some very good points here. Indeed, there are many new technologies that I am very positive on. Nanotech would probably be at the forefront of this. There are unlimited applications for a technology that literally allows one to rearrange the building blocks of life (molecules) to conform to one's needs. This is not a new concept. But the underlying technologies have become much cheaper than the two previous speculative booms that the sector enjoyed (and then suffered through) in 2000 and 2004. Very much like the concept of the computer was posed decades before it became a useful tool, in time nanotech will gradually begin to make waves on our lives and economy. The companies that are able to be at the forefront of this will likely become some of the better investments of the next few decades.
Additionally, I still believe there are advancements to come in communications and networking. The recent introduction of "smart phones" is probably the most notable manifestation of this. Network speeds and accessibility are enjoying exponential growth. With it, they are redefining what people are able to do "away from the office." Often seen as a gimmick for text messaging friends and other social networking time-wasters, the open source nature of these things are enabling people to do away with numerous other burdensome tools and making us more productive in the process.
Another area that I see new and exciting growth opportunities are in so-called "new media." I am already invested heavily in this industry - via this blog. I don't think anyone can honestly say what the next medium will be for the transmission of news media, entertainment, or advertising. But it is apparent that it will be far more customizable and "on demand" than previous versions. There will be little bubbles along the way - for the life of me, I can't figure out what draws people to Twitter. And yes, I'm aware of the irony that blogging is itself a potential bubble.
So back to the original question from my reader TH. Why don't I spend more time talking about this kind of stuff?
The short answer is because even though I want to be invested in these technologies, I firmly believe I can do so at a fraction of the price in 2-5 years down the road. And this belief is best conveyed with an understanding of our current deflationary situation. If it were inflation that I saw in the near or intermediate future, I wouldn't care much for valuations or balance sheets. I would be buying assets on margin in expectation of their imminent explosive growth.
As I began my research into financial markets, the first area of interest for me was in understanding the history of markets. I suppose it would have been easier if I became enamored with the impressive growth of homebuilding stocks, but that seemed all too short term and frivolous to me. I was after the big picture. The more I began to research this, the more it became clear to me that successful investing rarely had much to do with picking stocks. Rather, it had more to do with making the right decisions in asset allocation once every 10-20 years. That's all that seemed to matter.
Think about it this way. Among those who were entering midlife in the late 60's/early 70's, how many managed to fully benefit by buying real estate and commodities with borrowed money at a low fixed rate of interest? And later on in the 70's how many had the acumen to sell those assets and buy stocks? And in 1999, at the height of the tech bubble, who in their right mind would sell everything and buy government bonds - and hold them for a decade?
The answer to all those questions is "not many." However, anyone who did make even one of those decisions was likely made very wealthy for the remainder of their lives. Any further decisions would have been irrelevant to their overall financial standing. For anyone else, the likely outcome was breaking even at best, bankruptcy at worst. Even those that managed to pick the best stocks through the 70's lost out to inflation. Those that held real estate into the early 80's were eventually forced to refinance debt at interest rates of 20%.
It is my contention that the environment for owning companies is poor, as it has been for 10 years. I could attempt to pick the best among the industries that I mentioned above. If I happen to be wrong - or early - I lose. Take Juniper Networks (JNPR) as an example. I like this company. They provide networking solutions for many of the new technologies I talked about above. They don't have as much risk as the underlying technologies because they simply service the needs of other companies. But they are trading at 22x their forward projected earnings and pay no dividend. Twenty two times! Of course those projected earnings could be affected by exogenous risk factors that have nothing to do with the company itself. How can I buy this with a 10 year horizon if I think there is a realistic possibility of it dropping 60%? I encounter the same conundrum in nearly every business that I feel has good growth prospects.
So we come back to the question at hand. Inflation or deflation. If it's inflation, I hold my nose and buy 'em. If it's deflation, I remain patient and wait for that 60% correction or more - yes even from these levels. It is a binary outcome. Hence, the focus of my blog and my attention is in determining this outcome.
Managing this will prove to be the single most important determinant of the future financial health of myself and my readers.
Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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