WHAT IS OBVIOUS IS NOW OBVIOUSLY RIGHT? YOU BET
My observation of aspiring bears and fearful bulls is that a lot of investors seem to be waiting for the S&P to move to 1200 or possibly 1250 before initiating short positions or liquidating longs. There is this square minded, vanilla perception that since the markets have fallen at such a substantial pace that they must have an equally substantial bounce. There are circumstances where this type of thinking is warranted. This, however, is not one of them. I have been saying for the past couple of weeks that the ferocity of this push down since the beginning of August has effectively broken the deception mechanism of the market. Participants in the financial markets will have a difficult time with this since every single investor out there is a contrarian. If what is obvious suddenly becomes obviously right instead of wrong, then confusion will ensue. That is exactly what we have here. What is obvious at present is that the markets are in a fairly serious downtrend. Fixed income markets and commodities are doing more than their fair share of confirming that the downtrend is very real. It is being led by financials and semiconductors. The same two sectors, by the way, that led the 2008 market debacle. These are all obvious facts. Don't try to get fancy and bring in a dose of contrarianism. As I said, the deception mechanism in the markets is not functioning like it did in say June of this year when I said to buy the dip in the markets. Put/call ratios, oscillators, sentiment surveys, volatility readings are all in a state of an expansion in their perceived normalized trading range. That means that the standard thought of XYZ indicator flashing a contrarian buy signal if it moves above 35 is in the process of being adjusted upward by 30-40 percent. Anomalous behavior now that is setting the stage for the evolution of what we see as being normal behavior in the markets. We're in a period of statistical anomalies. How many times over the past few weeks have you heard of moves in both indicators and the general market being the greatest of the past several decades? Nature seems to be in an uproar as well, with earthquakes in places that rarely experience them and hurricanes headed for regions that aren't used to this type of event. A statistically anomalous period in every way possible. Tomorrow should be interesting. Seats belts and barf bags are...
SO, UM, WHERE IS THE PANIC AGAIN?
It's cool to be a contrarian. It's like being a Michael Jackson fan in the 80's. A Nirvana fan in the 90's. A mortgage broker until 2006. And a foreclosure specialist until present date. All market participants have their favorite ways of measuring fear, greed, depression and despondency. Since August 1st, I have been saying that we are entering a period where contrarian theory will be tested. Watching your favorite indicator for clues as to when and where the market bottom stopped working a couple weeks ago. There is no reason to expect it to suddenly click. Market participants, however, have a way of rationalizing favorite indicators to the point where they can make the color green seem like blue if it appeases their emotional and intellectual market ego. Be careful of that as it means you have one foot in the grave and the other slipping in the mud. Contraianism becomes a costly disease during points in time when markets have a single minded purpose either to the upside or downside. This current decline in the markets kicked off with an excess of pessimism that had a lot of people doubting its validity. According to the study I posted here on July 31st, the fact that the market was ignoring the excess in bearish sentiment made the downside all the more dangerous, only serving to strengthen its validity. Take the excess optimism that has been apparent to everyone in the gold and silver markets for this entire year. Contrarians who attempted to doubt the uptrend and take on short positions have had to deal with a continuous move up for the majority of 2011. There is a time when the "deception mechanism" of the market breaks. Upon breaking, the uptrend or downtrend becomes self-reinforcing and accelerates greatly over time. These are markets that are the most dangerous to those attempting to pick tops or bottoms based on simple "everyone is bullish or bearish" theory. The equity markets have a very simple and accurate means of judging panic and fear. With a commodity like gold, it is one single commodity issue. You don't have any periphery commodity issues that can give you clues as to what gold is going to do. It is a singular entity unto itself. However, with the broad stock indices, you have thousands of stocks that can give you hints as to what certain groups of investors are thinking, loving and hating. I detailed this in my article about Phase 4 Investors in written in February. At present, it is important to look at the most widely, popular names in order to gauge the levels...
YOU WANT 1250 ON THE S&P 500? 2012 MAY BE YOUR YEAR. IT WON’T HAPPEN IN 2011.
This is an angry market. It feels angry. It looks ugly. It wants heads. It wants hearts. It feels like a market that has trapped a lot of traders, fund managers and individual investors. The foot of the market has been implanted firmly on the neck of an entire group of bulls and it seems reluctant to lift its weight off. Those who have been struggling under the weight of the market have only one goal at this point: To stop the pain by raising cash or hedging their positions. The market knows this and keeps dropping the ball further and further down the hole so that those investors who are stuck will have to climb from deeper and deeper depths. This is exactly why I don't think we get too far above 1200 on the S&P 500 again this year. There are simply too many looking for their savior in the form of higher prices. In order to be saved, you have to be liked. And if you're into being liked, then the financial markets are the last you should be. I hear the tuition at clown school is pretty cheap...
WHEN YOU TRY HARD THEN YOU DIE HARD
Learn to walk away. It's such an important aspect of investing in the markets. And, unfortunately, few realize the importance enough to take this exercise in discipline seriously. The markets are one place where doing too much work can get you in trouble. "When you try hard then you die hard" to quote Kanye West. It becomes a pattern of overthinking and overplaying the hand which your dealt. If there was ever a time to walk away from the markets, this August does indeed qualify. We are entering one of those periods where the market is going to become extremely deceptive in its behavior. Contrarian theory will be tested. As will various popular technical indicators. The decline has already managed to pop up on the screen of most technicians as being oversold and overly-bearish. Those who take comfort in such indicators will face pressure in the weeks ahead. This happens from time to time. If contrarian theory was always correct all a trader would have to do is figure out what the masses are doing, do the opposite and accumulate a fortune. While I believe that being a contrarian is one of the most important facets of speculation, it has moments when it turns to mush. We are entering one of those moments. In summary: walk...
10 STOCKS TO BUY SHOULD THE FIREBOMBING IN THE MARKETS CONTINUE
Human beings enjoy picking on others as long as it can be done with some measure of privacy. Internet forums of various sorts have proven this time and time again. How many times do you hear individuals being loving and understanding as opposed to angry and confrontational? The anonymity of the internet gives human beings the power to avoid their greatest fear. That is the fear of direct, face to face confrontation where real thoughts are expressed with fluidity. The financial markets can also serve as a venue for expressing our passion, as human beings, for anonymous aggression. This is after all a zero-sum game. For every dollar you make, somebody is on the other side of your trade losing a dollar. That Ferrari that your investment in Google bought you came at the expense of a guy who had his Ferrari repossessed by shorting Google. Joy is bought and misery is sold on a daily basis. Unbeknownst to market participants, the investments you are making can become like a shove in the chest to a guy who is taking the opposite side of your trade. If we were to personify the markets it is nothing more than a Battle Royale. Steel chairs, closed fists and mayhem on a minute by minute basis. There is no group I enjoy picking on more than short sellers. It's not because I am opposed to short selling. I have sold short stocks many times in the past and will continue to do so. What makes brawling with short sellers so appealing is the fact that a majority of them are traders at heart. When any stock is dominated by traders, the footprints that stock tends to leave become all the more transparent. You can sniff out its intentions well before it gets to its destination. They will sell short into failed patterns and pile on as the stock continues to move lower. Weak markets make them more aggressive. A bearish liquor of sorts is passed amongst them. They literally swarm like an army of angry ants on a hapless caterpillar that has stumbled into their den. And much like an army of ants will react to a group of kids pouring water on their den, short sellers will do the same once a stock reverses course and begins moving up. They literally scatter in each and every direction looking for cover. This causes explosive moves in a stock that would otherwise be impossible without the help of short sellers adding fuel to the upside by covering their positions. For this reason, the list of stocks that aggressive traders or investors should get...
NFLX WANTS TO EAT MORE SHORTS. LOTS MORE.
A review of the price action in NFLX is below. Notes in the chart and all. The earnings numbers mean nothing. Companies like NFLX don't top on bad earnings numbers. You see, that would too easy. It would be the equivalent of the market giving you a big hug, followed by a bag of cash. The market doesn't give out hugs. It is a miserly old scrooge that wants you to fall into a deep crevasse, far from civilization so that rescue will be impossible. When NFLX tops, it will do so on fantastic earnings numbers, followed by an overwhelming feeling of conviction amongst longs in the stocks and outright fear, panic and depression amongst the shorts. It doesn't seem we are close to that point. I'm expecting new highs shortly. NFLX chart is below: click to...
ANOTHER SIMPLE RULE THAT WILL HELP YOU CULTIVATE VOICES IN YOUR HEAD
There are simple, niche rules that I like to use in an attempt to understand the illogical, treacherous nature of the financial markets. One of the many niche rules I have is that of a dodged worst case scenario. What do I mean by "dodged worst case scenario"? Coming into trading on Monday I thought that the odds heavily favored the bears being able to seize control of the markets early and not allowing the bulls a chance to resurface. I wasn't expecting a devastating decline by any means. However, I also wasn't expecting the bulls to be able to turn what should have been a bad day into a run of the mill down day. The bulls managed to dodge the worst case scenario by a wide margin. The bears failed to capitalize. What does that tell you as an investor? It is similar to a football team that recovers a fumble and then is unable to score 20 yards away from the end zone. Failing to capitalize on such an opportunity usually means that your football team has numerous weaknesses. Weaknesses that will prohibit that team from being able to make a run for the playoffs or even finish the season with a winning record. The bears failed to capitalize on an opportunity to take the markets down....again. The bulls showed that they have full control over the markets by salvaging what could have been a 1% plus down day in the major averages....again. Bulls win and bears lose....again. Here is another example of it from my weekly chart review three weeks ago: If you read the notes on the chart by the blue box, you can see how the bears failed to take advantage of a fumble by the bulls in May. From that point on the bulls just held onto control of the ball, burning down the clock, until they scored a devastatingly effective series of touchdowns with the recent move in gold. The bulls dodged the worst case scenario in GLD by a mile. The bears failed to capitalize. The result: a record move in gold prices to the upside over the past few weeks. The markets are always speaking to you. Every single day. You just have to quiet your voice (read: ego) and listen to the only voice that...
HOW YOUR SURVIVAL IS THE GREATEST ASSET YOU HAVE
The financial markets are one of the few places where every aspect of behavior, valuation, and price movement is broken down into quantifiable terms. There are ratios to measure valuations. There are ratios to measure the ratios of valuation. There are a myriad of statistics to measure how investors are feeling on a particular day, week or month. There are thousands of measures of price and even more measures to measure the various measures. It's a world dominated by numbers and the interpretation of the values that those numbers have on a minute by minute basis. There is a number that makes its home right in the center of this universe of values and ratios that is rarely discussed or even mentioned. In fact, for all the years I have been involved in finance I haven't heard it mentioned at all. This is despite the fact that this number may be the most important number of all. What is it? I call it the survival quotient. The fact that you are in the markets and freely available to speculate with the capital you have at hand has a value. The value comes in the form of opportunity. When your capital diminishes significantly, so does your survival quotient. The moment you cease speculation in the markets due to a disastrous loss, your survival quotient will go to zero. Meaning that all of the opportunity you had and the potential that came with it to generate X% over your lifetime disappears. The fact that such a value exists means that when you take a loss in your portfolio of a fixed dollar amount, then the value of taking that loss is a lot greater than it would seem on the surface because it boosts your survival quotient. Here are two examples: A. Trader John runs a portfolio of $50,000. He is a reasonably skilled trader who understand the basics of risk control and invests semi-aggressively. He can reasonably be expected to bring in 10% per annum when all of the volatility is averaged out over the long-term. The $50,000 compounded on an annual basis at 10% over 20 years will become roughly $340,000 at the end of the period. If Trader John was unable to control his risk, then not only would he lose a percentage of his current capital, he would also jeopardize the possibility of him getting to the $340,000 that could be his at the end of his 20 year trading period if he sticks to simple risk management rules. This simply means that Trader John cutting losses and having a defined risk management strategy raises his survival...
SEVEN LOGICAL THOUGHTS THAT CAN RUIN YOUR FINANCIAL LIFE
This article also appears on Forbes The logical mind that has created most of the advancement we have seen as humankind is a detriment in the financial markets. While logic allows you to be a functional human being, having a firm grasp of what is illogical will be what allows you to profit consistently. What do I mean? Let’s start with a simple premise. In order to survive in the financial markets over the long run, you must view the market as a thief. It wants what you have and uses manipulation of emotion to get it. The primary emotions are that of fear and greed. It is coded in your DNA to become greedy when all is going in your favor. Similarly, when you are dying a slow death at the hands of a blistering foul wind, you are programmed to flee the situation. The market routinely manipulates the emotions of fear and greed, causing you to exit positions when the probability of achieving outstanding gains over the next 12, 18 or 24 months are at their best. Conversely, you are manipulated into buying situations that are inherently dangerous and have a high probability of working against you during periods of extraordinary comfort and joy. Routinely, issues of seemingly logical importance make their way into your psyche during the most crucial times. As an example, during the depths of financial Armageddon in 2008, it was seen as perfectly logical that the financial system as we know could be finished. The phrase “end of capitalism” was being thrown around like we were talking about the end of a baseball game. Logical thinking told investors that safety was of the utmost importance. Anything tied to capitalism was to be abandoned in the favor of cash. Preferably cash in a foreign currency of a third world country that wasn’t tied to capitalism. It was thought of as illogical to recommend heavy allocation into equities. The thought of the Nasdaq being near ten year highs just three years later would have been seen as illogical thinking. It became logical to think that the financial markets were destined for a sideways range at best, with a continued bear market and deep depression being the logical outcome. The logical mind failed investors, as it always does. The illogical thinkers came out ahead, as they usually do. The logical mind can also betray investors in individual stocks. The recent action in companies like Netflix (NFLX) and LinkedIn (LNKD) deceive the logical mind. In fact, the fuel for their fire is based on a logical dissection of a situation that can’t be logically understood. I have...
QUICK THOUGHTS
- LNKD closed the day close to 108. I think the price action in this stock over the long-term is going to make NFLX looks like child's play. I wrote about the dynamic that will be involved in the share price over the long-term a few days after it went public. The article I wrote for TheStreet is here. It's a classic case of the logical mind being raped and pillaged by the financial markets yet again. The logical mind has a place in every facet of society and most businesses, except for the financial markets. I will be writing about the logical vs. illogical mind in the coming days. - I think we are entering an era where governmental policies and economics will diverge from corporate profitability and progress. We have already seen it over the past decade. While individual company balance sheets in the US have grown stronger, our countries balance sheet looks as if it can crumble at a moments notice. We are caught in a self-reinforcing cycle of inept, selfish politicians putting their own interests before that of the office and the people they serve. This creates gridlock in government at the most crucial of times. The steps needed to right the ship are not being taken because the political web has grown to such a point that effective economic policy doesn't stand a chance of moving an inch. - I mentioned during my routine weekend commentary that the easy money in the markets had been made. The first few days of this week have proved that beyond a doubt. Today's choppy, volatility ridden price action was the icing on the cake. It's not going to get any better. Turn off your screen. Take a trip. Read a book. Hang out with your kids. Go watch roller derby. Anything but mid-July trading. I can count on one hand the number of times July has been a good month. 17 years in and the month of July remains the same grind. - NFLX hit 300 today intra-day. I see no signs of the pessimism, doubt and logical analysis of the stock coming to an end. I wrote about NFLX going up further than anyone would expect way back in early February. It was the first article I wrote for TheStreet. As long as there is excessive doubt and an abundance of logical analysis that creates doubt in the name, there won't be a top. Technically I see no signs of a top, as well. $400 by year...