THE BUTTER KNIFE POSSE
Here is one guy that gets it. Brian Belski at BMO Capital Markets has this to say: "We believe performance patterns alone are not enough to justify directional market calls," he writes. Almost all bull market corrections are triggered by a Fed rate hike or a spike in oil prices, and both of these conditions are "nonexistent in the current environment." "Instead, investors should consider the macro and fundamental backdrop along with risk-taking levels to determine whether or not the performance is justified. From our perspective, the data simply do not support the correction talk and we remain committed to our optimistic market outlook through year-end and into 2014. As such, we believe those investors waiting to “buy on the dip” are likely to be disappointed." I'll leave the debate about the causes for major corrections, whether Fed related, oil related, jobs related or government related up to the macro specialists to argue. Belski sees macro threats as being "nonexistent" from his perspective. He may be right. I want to add one more facet that I don't hear mentioned very often. What if instead of the traditional thinking that says this bull market started in 2009 and has reached maturity after a near five year run, this bull market is actually in year one? What if the technical progress we have made in 2013 is actually the real kick-off to this bull market, with the move up to 2012 simply being further probing of the decade long range faced by the S&P and Dow? This has been something I have been reminding readers of on a fairly consistent basis, but the traditional thinkers on Wall Street that attempt to impress with consensus driven projections that have no relevancy to an investors bottom-line will always get this type of bull market wrong. Not sometimes. Always. They will always be too conservative. They will always become pessimistic early. They will always cite valuation, sentiment and earnings as a reason to abandon the trend towards prosperity that the market is only too happy to share. It is simply too dynamic a situation to be judged by a traditionalist. It's like bringing a butter knife to a fight with a hyper-advanced group of space aliens. The butter knife just can't keep up with the dynamics that surround it. The plague of Wall Street as it stands currently is that they have the start of this bull market all wrong. If they cannot judge the start, how can we expect them to be able to judge the end...
THE PROCESS DRIVEN INVESTOR
The only way to avoid frustration in the markets is to become rooted in your process. I don't need to know what your process is nor do I care. It doesn't matter, really. What matters is that your process takes the place of becoming attached to daily results. Following the process. Judging daily results by how well you remained grounded in the process. That is one more barrier that good investors must cross in order to become great. I've mentioned countless times how I measure my decision making by the long-term expected value (EV) of the decision. I don't isolate each decision to buy, sell, hold, increase or any number of options I have on a daily basis individually. Instead, I look at the EV of the decision when weighed against my own process. When you become rooted in the process, having confidence that the EV of your decisions will fall onto the positive side of the statistical meter over the long-term, then you can avoid frustration to a great extent. It is the frustration that comes with being rooted in results that disallows investors from functioning properly once they hit a rough patch. All of the ills that stem from frustration in the markets can be rooted in paying attention to raw results instead of attention to the process. Attention to the quality of the decision itself, as opposed to the immediate result of that decision is where peace with the markets is born from. Knowing the EV of each of your decisions comes with time and experience. The intimate understanding of your own process. The more familiar you are with each facet of your process, the better your results over the l0ng-term. A guy like David Tepper or Bruce Kovner understands (consciously or not) the EV of each decision they are making when weighed against a long-term sample of similar decisions according to their process. Get your process right. Get your mind right. Get your focus right. Results will...
4 LONG-TERM CHARTS THAT WILL OPEN YOUR EYES AS TO WHERE THE INTENTIONS OF THIS MARKET LIE
click chart to enlarge
IN THIS MARKET ATTEMPTS TO CONVINCE INVESTORS TO SELL SHOULD BE BOUGHT
The same group of rudimentary-minded analysts of short-term movements in the markets are declaring today as an obvious end for the run we have experienced since the October lows. Citing among other things, the various sentiment measures such as AAII and the put/call ratio that have been consistently keeping investors off balance for the entirety of this rally. And then there is the obvious technical perfection of a bearish kind that came with today's steady decline into the close. It is as if the market is going out of its way to sell the bearish theme to the gaggle of price driven investors that occupy the current market. Why is the market so eagerly selling the message with today's technical debacle if its intentions are as nefarious as some think? Isn't the intention of the market to deceive through slight of hand as opposed to warn through blatant acts of violence against investors? This is the classic example of the obvious trade being the wrong trade in the market. The depth of my argument doesn't end there, however. Here is the technical picture from an alternative point of view: 1. I took the time to look at single bars in the Nasdaq Composite where the open was the high for the day, followed by a close at the lows for the day that exceeded a loss of 1.5% versus the previous close, as we experienced today. I excluded gap downs, as these are typically event driven as opposed to momentum driven declines. There have only been four prior incidences in 2013 prior to today. In all of the incidences to date, the market bottomed no more than 4 days after the blatantly bearish bar formed. Here is a look at the chart showing each example: click chart to enlarge 2. In yesterday's post, I touched on the fact that the Nasdaq 100 had not even come close to touching the trajectory in an attempt to retest. While this was very bullish behavior, the fact that we caved in today doesn't negate the bullish scenario at all. In fact, the market is now taking part in a standard retest of an important trajectory before moving higher. I would have preferred a continued consolidation followed by a move higher. This, however, still fulfills the bullish requirements for continuation to the upside: 3. The Russell has been leading the march down over the past several days. Take a close look as to what is dead ahead. The bottom end of the channel that has been supporting the...
PREPARE FOR THE NITRO CIRCUS
This market is about to get resoundingly silly in nature. It is enough to want to make a grown man want to exercise leverage into a high-probability trade that is screaming "come get me" in a financially sensual French accent. Unfortunately, I am bound by the incontrovertible laws of expected value (EV). As outlined earlier today, I make my living by being on the right side of EV not some of the time, but all of the time. Put simply, statistically sound decision making. While the trade itself is of a high probability, my decision to take on such an arrangement for the portfolios I manage is not cohesive with the various moving parts that make up the process. And it is the process I am concerned with more than anything. My mental makeup doesn't mean that your hand has to be swatted away from whatever device you are using to infiltrate the markets, however. Here is what I am seeing: - The consolidation that I expected for the Nasdaq 100 after breaking the key trajectory has not even come close to touching the trajectory in an effort to retest. Instead, it has simply moved into a tight sideways range ABOVE the trajectory as it prepares for the next leg up. Astoundingly bullish behavior. - What this pugnacious demonstration of bullish bravado is screaming into my open ears is that the combination of a bullish Q1-Q3, middle of Q4 seasonality, brilliant technical picture and very little in the way of potential fundamental headwinds for the rest of 2013 is simply too powerful a bullish concoction for the markets to ignore. They don't even want to give a little bit back, allowing those misfits who were not reading this website on October 10th the opportunity to make up for the grave error of not having sufficient equity exposure. What is dastardly about the current bull trend is the fact that it is being led by the Ben-Gay index of equity securities. Namely: Utilities, basic materials, consumer staples. The stuff that old men with statements held in trembling hands have great pride in holding for a majority of their lifetimes. In other words, the stuff that I have no exposure to whatsoever. But never mind that, I have already come to terms that to every ebb there is flow. My time will come shortly. In the meantime, I will manage the in...
WEIGHING THE EXPECTED VALUE OF LONG-TERM DECISION MAKING IN FINANCE
At any given point, an investor faces the decision to buy, sell or hold an investment. When those decisions are isolated, without any reference of price or time, then they can be viewed as having an identical expected value (EV) over the long term. In other words, they can be viewed as being random in nature. It is only when referenced against time, price, performance, history and other variables that dictate an investor's behavior that the long-term EV of each decision will cause the necessary edge to outperform or in a negative scenario, the undesirable disadvantage of underperformance. The long-term EV of adding, reducing or remaining steady in exposure is up to each investor to determine. There is no black and white definition of what adds EV because each investors method of investment, psychology and decision making process varies. There is one standard, however, that should be at the forefront of an investor's mind with each decision: Is the long-term expected value of this decision positive? That means that each decision you make is made against a framework of 100, 500 or 1000 similar decisions that are made during an investor's tenure as market participant. If the decision has a negative EV over the long-term then it doesn't matter if you feel you will be successful this one time. What is important is that you know that your nature, framework, psychology or whatever you decide to classify it as is such that over a period of time, the decision will prove harmful. Let's look at EV as it applies to everyday life: Today I walked by a fancy jewelry store that had lots of glistening diamonds, intricate watches and ornate bracelets in the window. Let's assume that instead of walking by I decided to pull my shirt over my face and proceeded to rob that jewelry store. Let's also assume that I was somewhat savvy in my approach, pulling off this robbery with minimal detection and therefore, no obvious consequences. The long-term EV of this approach to the jewelry store is multi-faceted. First, given the short-term satisfaction and ease with which I was able to "come up," my perception of jewelry stores would change. This change in perception from a jewelry store being somewhere you shop at to a profit center with infinite returns would permanently shift every other decision I make that has a positive EV. The relative returns of these positive EV decisions simply wouldn't carry weight versus the infinite returns of the jewelry store. It would then become inevitable that I repeat the decision with the negative long-term EV, which is to not simply walk past...
THE OBSESSION WITH VOLUME MUST END NOW
Investors need to get over the volume comparisons to bull markets of the past. These comparisons, being relied upon to dictate investment attitude towards the market, have single-handedly been causing investors to either tread lightly or not at all for the entirety of this rally. There is no scientific explanation for why index volume has been steadily decreasing as this rally has progressed. The absolutists that make up the world of high finance don't seem to want to contend with the fact that markets are in a perpetual stage of change. There is no correct analysis, only the correct analysis of the time. There is no rule that says a rally must come on progressively higher volume, such as what we experienced in the 90s. To pacify the minds of those who are always searching for the Why? in things, I propose the following list of explanations as to why volume has been steadily decreasing since this rally commenced: 1. ETFs have altered the technical framework of gaining exposure, hedging exposure or outright speculation in the markets. The amount of volume ETFs are attracting by themselves is enough reason to believe that the volume framework for which we are used to as investors will change in this post-crisis world. 2. There isn't enough genuine interest in the markets to cultivate the type of volume increase that comes with true belief in a market. This perpetual state of volume decrease is a testament to how devastating the past decade was to investor sentiment. In speaking to investors on a weekly basis, there isn't one I have come across that isn't skeptical of some or all facets of Wall Street at this point. The distrust is as deeply ingrained in the psyche as the optimistic love bubble that popped in 2000 and was set ablaze in 2008. Perhaps two reasons is not exactly list, but there are only so many ways to explain a participation based indicator. In essence, continued utilization of volume as an excuse not be long following years of data suggesting that it doesn't matter is the crutch from which dismissive acts of bearish rebellion are born. Give it up before the market forces realization....
THE COMPARISONS TO 1995 ARE ACCURATE BECAUSE THIS IS 1995
Business Insider published an article today titled "The Stock Market Is About To Do Something It Hasn't Done Since 1995" In the article it points out the following: "All 10 sectors of the S&P have posted double-digit gains year-to-date, a rare market trait considering that it has been nearly 20 years since all 10 sectors of the S&P have registered annual gains of 10% or more," he added. "Indeed, the last and only time it happened was in 1995, following the equity blood bath in 1994, when the Federal Reserve brutally raised the Fed Funds rate six times." I bring your attention to this piece of research because the faded memory of 1995 should be retuned and brought to the forefront of the investor consciousness for the remainder of 2013. A little over one month ago I posted a study comparing the Dow of 1995 to today's market. We'll get to the technical points in minute. Investor psychology of that time was very similar to today. Equities had just started to warm the hearts of the investing public again after contending with a post-1987 crash and early 1990s recession. The jaded memories of losses suffered in the past were still too fresh for investors fully commit, however. They were skeptical of Wall Street. Skeptical of future economic calamity. The professional investors, fund managers, traders, analysts of the time were not much better. Much like today, they were confusing what was really the beginning of a bull run with what they perceived to be the end of a bull market. After all, from the low of the 1987 crash up to November of 1995 the Dow had risen close to 130%. Not unlike the Dow of today that has risen a little over 100% from the 2009 lows to November of 2013. The truth of the matter, as investors of all pedigree were soon to find out, was that the markets were only getting started. From a technical standpoint, the most pertinent information as it relates to Q4 of 2013 is that during Q4 of 1995 the Dow experienced a powerful Q4 rally that drove the Dow up 8% following an extended consolidation. I outlined that point in this chart included in that article from September. A majority of those gains were experienced in November of 1995. We are in an extended consolidation for the Dow. It is November of 2013. The correlations are vast and deep in nature. It is not a coincidence at all. Look into the trajectory points. Look into the sentiment at the time. Look into the attitude towards equity...
OCTOBER PERFORMANCE SUMMARY AND LOOKING AHEAD TO NOVEMBER
*This is my monthly letter to investors summarizing the month of October. The full PDF version of the summary, including managed account performance data as well as a few added components is only available via email. Return data will no longer be published as a part of the summary. If you would like to be added to the monthly email list, please contact me at mail@t11capital.com - Largest winning position in October: CIDM +19.33% – Largest losing position in October: WMIH -9.84% – New additions to portfolio: BFCF – New liquidations in portfolio: HMPR Portfolio Highlights For October: – CIDM was the leading gainer in the portfolios during the month of October. The company announced a transformative acquisition during the month that completes their transition from a cinema services company to a leading digital content distributor. The acquisition is immediately accretive, with only a mild level of dilution taking place with a $13 million stock offering. The acquisition does provide CIDM with enough cash flow from operations going forward to avoid further dilution in the future, which has been the major concern among investors. The company acquired Gaiam's “GVE” unit for $51.5 million. The most alluring part of the deal is GVE's licensing agreements with major entertainment brands such as WWE, NFL and Discovery, which immediately transforms CIDM's library, as well as their clout in the marketplace. Following the acquisition, CIDM now has over 32,000 titles, relationships with every major retailer from Netflix and Amazon to Walmart and Target. This transaction turns CIDM into a company with $320 million in revenue. That revenue number is miniscule when taking into account the market share that the company can command as a result of their newly found dominant position. Digital content distribution is the engine of the current entertainment business model. Those who deliver content to the homes of consumers will come to rely on companies like CIDM at an ever increasing rate to deliver the content consumers demand on an ongoing basis. This leaves CIDM with a highly-reliable, beginning stage, recurring revenue model that can be leveraged to the hilt to gain further market share. The aggressive nature of management, along with their diligent nature when it comes to tending to the debt structure makes for some outstanding possibilities going forward. 2014 should produce some noticeable results for the company as their efforts of the past few years start becoming reflected in the top and bottom line numbers, resulting in a dramatic increase in share price. – EVOL posted a gain of close to 9% for October. This is another portfolio holding that announced an acquisition during...
5 CHARTS THAT ARE MIGHTIER THAN BOTH THE CUP AND THE SWORD FOR THE WEEK AHEAD
NASDAQ 100 S&P 500 DOW TRANSPORTS...