A Rising Tide Lifts All Boats

There’s a ton of divergences occurring. According to some “expert” voices in the blogosphere, the divergences don’t matter. That’s nonsense. Divergences do matter. They provide signals that can assist speculators on when to or when not to allocate capital. Additionally, maybe certain divergences signal to take some risk off the table. Sure a perma-bear or perma-bull can find enough signals in any nook or cranny they search to warrant their stated opinions, but that’s the nature of data and confirmation bias.

I would say caution is warranted across multiple markets. High-yield bonds i.e. junk bonds finally sold off with a recovery into a potential double top for JNK & HYG and in an earlier post, I had stated that junk selling may be the final piece the markets would need to see for a significant correction to occur. That may still be the case, but there are enough other factors to justify a cautious stance. Everything happens so rapidly in the markets now, so if you’re not nimble then say goodnight to any short profits. The NYSE A/D line was descending but has since resumed its climb to reach a new all-time high. Small caps(Russell 2000) sold off 8% during that last month’s downmove and many published analysts thought that may be the extent of the move. Turns out they were right…for now. My go-to indicators show strong potential for a continued down-move, however one of the indicators is flattening in the short-term. If long-term resistance gets broken on the RUT? Well then more damage could be on the horizon for a larger swath of the markets’ asset classes.

Preferreds can sometimes be a leading indicator of deteriorating credit conditions, reason being because they’re primarily issued by financial institutions and REITS. Along with most everything else, we saw preferred stock funds temporarily turn down but have since recovered into a lower zone that’s been essentially flat for the last few weeks. There were some major M&A deals that were scrapped last month, but who cares. Who cares about anything in the game of speculation if it isn’t related to a central bank, right? Seriously, who cares anymore? Everything just goes up anyway. Who cares about technical analysis? You can’t trade without volatility. There couldn’t be a worse time in modern financial history for a trader to try and stake his or her claim in the world by beating the markets.

Before you assume it’s all sour grapes with me because of my own trading results, please understand that like any other prudent asset allocator I maintain multiple portfolios for various strategies. Most are dedicated to sound asset allocation strategy as well as conservative stock selection across the best companies in the world; the kind of companies that can weather any storm. As much as I enjoy fundamental analysis and good old stock picking through the breakdown of a company’s financial statements and filings, I get more of a kick out of trading on the price action. My smallest portfolio is my trading portfolio and thus that helps to mitigate the damage of the strategies I’ve been utilizing the past couple of years. So no I’m not entirely bitter because the big bad bully market took all my marbles. I’ve still gots me marbles and I’m still playing the game. Strategies have to be shifted in light of the current environment where HFT and central bank support dictates market movements and investor sentiment. I’m certainly not alone in my mediocre trading results of the past couple years.

Up until 2012, the arcane magic of technical analysis still worked quite nicely. You could still use decades old strategies based on squiggly patterns of price & volume to regularly snag profits out of the market. But what does it say to you when some of the most respected traders of all time are consistently losing? What does it say to you when three of Schwager’s Market Wizards who run billions in AUM continue to come up with negative performance that is far below even the S&P 500 index? You have to really question why the hell you’re not holding a simple double or triple long ETF of the S&P 500 or why you think you can outsmart a rigged market. Have a look at HSBC’s latest scorecard of hedge fund performance. Observe the performance of the individually legendary Tudor, Kovner, and Bacon:

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It’s this sort of performance and environment that takes some of the fun out of the game. Intrinsically, trading is a competitive endeavor so there’s no giving up on the fight to earn profits against the world, but right now is not a time to be fighting if you’re not winning consistently. It’s a time for reflection on strategies, skillset, and the overall approach to your trading business.

The lack of any real movement in the markets could be a seasonal effect. It could be a product of the gross market manipulations. Or it could be that something worse may be on the horizon. By now the CNBC interview with Sam Zell has been shared and commented on by virtually everyone in the financial media and blogosphere. I won’t beat it to death here, but his comments are worth noting. He’s not some chump billionaire always looking for the limelight or setting up a book sale or political career. He’s the original “Grave Dancer” and he took Blackstone to school in the $39B sale of his company, Equity Office Properties Trust, at the top back in 2007. His words are worth heeding, but as with every other expert, not following blindly.

These are the key points he made on Squawk Box:

“The stock market is at an all-time, but economic activity is not at an all-time. People have no place else to put their money, and the stock market is getting more than its share. It’s very likely that something has to give here.”

“I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking. If there’s a change in confidence or some international event that changes the dynamics, people could in effect take a different position with reference to the market.”

– “It’s almost every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue. When you got a demand issue it’s hard to imagine the stock market at an all-time high.”

– “This is the first time I ever remember where having cash isn’t such a terrible thing, despite the fact that interest rates are as low as they are.”

So forgive my redundancy for reposting what’s already been reposted a million times, but the original link and interview can be found at: http://finance.yahoo.com/news/sam-zell-stock-market-correction-124350576.html#

Just to provide a little graphical support to the bullet points by Zell, take a gander at the following chart shared by professor Mark Perry of the Carpe Diem blog:

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Meaningful or meaningless? You know the answer.

Coming back to underperforming professionals, it’s not just trader hedgies having a rough go. Even the plain old vanilla mutual fund managers in the large-cap space continue to also underperform a benchmark of the S&P 500. In a recent MoneyBeat column, David Kostin was quoted: “Only 23% of large-cap mutual fund managers have outperformed the S&P 500 this year, rivaling the worst performance in the past decade, according to the chief U.S. equity strategist at Goldman. By comparison, about 37% of fund managers have outperformed the benchmark since 2003. Only performances in 2006, 2010 and 2011 have been as bad or worse than the current year’s pace.”

In times like these where the US ZIRP and the Euro NIRP forces money into stocks, Siegel’s Stocks For the Long Run probably sounds better and better for many investors if they haven’t already shoved all their retirement funds into Vanguard’s warm embrace. I want to take a moment here to plug the research of Stansberry Research & Associates. Specifically, I want to call out the work of Porter Stansberry, Dr. Steve Sjuggerud, and Dan Ferris. If you are unfamiliar with their work then maybe it’s time you familiarized yourself with them, if you intend to be individually selecting stocks for your portfolio(s). I have been using their services for close to a decade. And in today’s market environment, they continue to be on the leading edge of most all of the macroeconomic happenings while also providing some of the highest quality deep research on equity selection out there. With a subscription to their advisories, I can honestly say you’d probably be getting the best bang for buck out there in the newsletter game. Having read plenty of samples of sell-side research from Wall St., these guys stack up and will assuredly enhance your ability to safely build a profitable equity portfolio.

Full disclosure, I have absolutely no relationship with Stansberry Research & Associates in any other capacity than as a satisfied subscriber. Like other services I have touted, I’m certain they don’t even know this blog exists. Additionally, that link to their site does not pay me some sort of commission. I truly just enjoy the quality of their products and wanted to take a moment to share that with my own readers. In my much younger days, I tried most every newsletter out there…Motley, everything under Agora, Richard Russell, amongst many others as I was learning the game and was simply too lazy at the time to open a book to teach myself just yet. For the last several years, these guys are the only equity research I rely on aside from my own. So I would recommend you visit their site and maybe try a subscription or two, I’m confident you won’t be sorry.

In the meantime, the markets are boring. No volatility; just summer flatness. Even the financial media and blogosphere are completely boring. No originality in content and certainly nothing new or profound being reported…and that includes Marginrich.com. I’ll keep posting my thoughts on various market observations but my next post I intend to share my thoughts on a different type of speculation, and that is sports betting specifically on college football. Having evaluated all the major sports, NCAA football is the one sport that consistently provides asymmetrical profit opportunities against any sportsbook whether it’s online or at a casino. Don’t get me wrong it ain’t easy, but if you do the research and have a quality understanding of the variables that go into some basic handicapping, then profits can be made.

Be safe and allocate intelligently because a rising tide does lift all boats. Just don’t take your eye off the ball for any reason while throwing money around willy-nilly…and I’m sorry for being gone so long. Life happens.

Whipsaw, Whipsaw

MAN ALIVE! That action on Monday is enough to make a trader fold up operations and go back to counting beans or selling un-needed crap to folks. That was seriously some hair-raising action. Did you get your stops ran? Did any of you traders get whipsawed by Monday’s action? Rest assured, you probably weren’t alone.

If you’re attempting to go short here across any of the indices and had your stops ran on Monday then kudos to you for maintaining discipline. However, you just may be missing out on more of the fun of a potential downmove. Hard to say because my crystal ball is in the shop and for some unforeseen reason I’m not omniscient. It really makes me mad that I can’t call the exact turns of the market. Oh well. I still think a downward short-term bias is in effect and eventually the perceived risk indexes(Russell 2000 & NASDAQ) will finally pull down the “Great Proxy”, the S&P 500.

So far, so good for the S&P 500 as it set new highs this week…and has promptly come off those highs. Is that strong price momentum? Have a look at the daily action in the VIX. It gapped down to start the week and within 3 days that gap has filled, but still yet, the VIX is still down around all-time lows.

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The MACD has been a pretty simple and fair indicator to clue traders in when the volatility is going to start spiking. Observe at the green lines that every time the MACD turned upwards, the VIX was usually in the early stage of an up-move. Are we at another up-move right now? It feels like it. If things get dicey, a quick move up to 20 on the VIX could easily occur.

A couple of weeks ago, SentimentTrader shared a chart depicting the VIX Put/Call Open Interest Ratio. It puts on full display what the current option action on the VIX is saying about volatility. Judge for yourself:

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There are plenty of messages being communicated very loudly and clearly by the markets. These aren’t esoteric signals that only the true professionals can divine. Anybody with the ability to read and some dial-up internet internet service can see these messages…more power to you if don’t have to result to a screeching connection via Juno or NetZero or whoever the hell provides dial-up these days. Also, to any readers who currently utilize dial-up to access this blog, please excuse my insensitivity.

Things are happening in the markets such as defensive rotation. Utilities have performed fantastically so far the past few months while the rotation to staples vs discretionary appears to have begun. Less and less issues are hitting 52-week highs despite the DOW and S&P 500 sitting near their own highs. Treasury rates continue to drop. Wal-Mart missed fairly big on YoY Q1 income. High-flying tech and small caps have already come off pretty hard and these are where the risk is allocated. Social media sites trading at P/E’s in the multi-hundreds. Biotech stories being sold on a wing and prayer for ridiculous valuations.

High-flying tech and small caps are part of what I call the 3-legged risk stool that are sort of propping up the animal spirits of the entire, current stock market. Two of those legs have been kicked out, so to speak, and yet still the S&P 500 hasn’t really shaken out the bulls. The third leg of the shaky risk stool and thus potentially the ultimate catalyst for a correction in the broader markets is junk bonds, I suspect.

If junk bonds correct here within the next 14 to 60 days, with remaining weakness in the NDX and RUT, then things can get real hairy, real fast for people who are poorly positioned for the move. Have a look at what Kimble shared over at his site a few days ago,

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So then what could be a catalyst besides stiff resistance? Oh I don’t know. Maybe the humongousest junk bond issuance in financial history. Anybody remember seeing this near the end of April?

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The markets have a funny tendency to act a little wonky after the largest-ever of anything occurs.

The action this week has that sort of a backdraft feeling to it. In case you never saw the movie, a backdraft(as defined by the Collins English Dictionary) is “an explosion that occurs when air reaches a fire that has used up all the available oxygen, often occurring when a door is opened to the room containing the fire.” Buyers potentially get a final pull into risk assets before an explosion outwards for a fast and hard move down after the right catalysts make their presence known.

Despite the already well covered move down in the Russell 2000, it appears as if there is plenty of room for a continuation downward. If you’re trading IWM, then keep your stops at an appropriate level. Biotech’s IBB essentially bounced off it’s 38.2% retracement using the week of August 8th, 2011 as your starting point for a quick Fibonacci analysis. A cautious short in IBB with the potential for further selling down to between $200 and $205, may yield a nice return during this summer. In a previous post, I had stated that I thought coffee was setting up for a short but my favorite indicators were not providing a green light just yet. Well those indicators finally gave their green light. If you’re feeling brave you can follow me on a short of JO with approximate targets of $35 and $30, if the selling momentum really gets going.

The list of investing icons who are advising caution continues to build. We’ve had mutual fund heroes like Romick of FPA and Yactkman share their thoughts months ago on building cash levels. Klarman, Marks, and Grantham have given the thumbs down. Now we had David Tepper, Mr. Highest Paid 2013 Hedgie, providing his valued insight on these precarious markets. It may not pay to listen to or heed a blogger like myself. That’s for you to decide; but you can’t dispute that it pays to heed what these most esteemed gentlemen have to share.

Early to the Unattended Short Party Again

Just wanted to apologize for a lack of posting activity. For newer readers expecting a little more activity, it gets tough around the holidays with family demands and traveling. My goal going forward is to post at least twice a week, and at the very least, once a week. I know that’s not on par with your favorite daily reads, but I hope I can continue to potentially add value to your investment life.

The markets just keep running, even with this past week’s slight consolidation. Hell, Friday’s pop was enough to put the S&P 500 at basically even for the week, the Russell 2000 a touch off the highs for the year, the NASDAQ at post-2000 highs, and the DOW in the same position as the Russell at a touch off the highs. Some consolidation, huh? Previously, I reasoned that a correction was on the horizon and illustrated with some charts why I thought that a correction was imminent. The results…

WRONG! The markets have been looking like a small blow-off would occur since the summer. Those signals were all false though and chartists who have been attempting to short the market keep coming up just that…short. The lesson that you should not fight the Fed keeps getting firmly taught in 2013, as noted by the under-performance of hedge funds, shorts artists, and tape readers. None the less, have a look at the following set of charts from several weeks ago. In a normal world that’s not flooded with liquidity chasing up financial assets around the world, these charts would generally portend of a change in trend. However, this ain’t a normal world to be speculating in.

These charts depict several factors of risk taking and risk abating, which one would think would normally affect the greater markets. Divergences abound and yet the rising continues. Observe:

1. SentimentTrader displayed the Rydex family of funds’ 12 year low in assets allocated to their money market funds

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2. The stock to bond ratio – one of SentimentTrader’s daily charts showing periods of over/under value in equities

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3. S&P 500 to JNK (junk bond ETF) – notice the previous downturns in the S&P 500 earlier this year when JNK turned down

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4. ZeroHedge provides a Bloomberg terminal snapshot of a nosedive in IWM shares outstanding while price remains stable

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5. Here’s another junkbond relative performance chart. Apologies to the author. I forgot from which blog I nicked it.

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6. Courtesy of DecisionPoint, going back to to 1999 one can see what a divergence from the PBI for the SPX generally means for the SPX

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Alright, enough with the slide show. There are so many more squiggle pictures that chartists could call upon to attempt to prove that a downturn is imminent but why bother? Liquidity is not going to dry up. Interest rates aren’t going to spike up past 6% and send the planet into recession tomorrow. Based on the performance of equity markets and despite a ton of divergent indicators, I’m beginning to get the feeling that the markets may just consolidate in a semi-volatile sideways range. There’s a real possibility that the markets just bounce along up and down plus or minus 1% – 3% into the new year before resuming an advance.

We keep coming back to this now overly used quote from 2007 by Chuck Prince, former head of CitiBank: “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.” This little gem has popped up almost everywhere in the financial blogosphere recently, so I figured I’d find a gratuitous reason to post it too as it is quite apropos. Good old Chucky “Cheese” Prince made this statement at the peak of the markets back in 2007 because he knew how unstable things were and yet he continued to allow the SIFI(systemically important financial institution) he ran to trade and underwrite garbage.

And while I’m at it, in case you don’t know what the co-crown prince of golden parachutes looks like; here’s his picture. Truly a face you can trust with managing hundreds of billions.

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For those ill-informed about Mr. Prince, he walked away from Citi with a cool $100M for overseeing the destruction of the bank. The reason he’s a co-crown prince of the golden parachute set is because he shares the crown with Stanley O’Neal, but I digress. We’re talking about the potential for a sideways consolidation in the market and not rehashing sour grapes on a who’s who behind the SIFI’s that have changed our world as we know it. As for speculative advice, well I have exited my short positions. I hedged my last move against the SPY and simply broke even. I’m currently taking a step back and allowing for the picture to clear up a little for a trader such as myself.

In my next post, I intend to touch on what matters and what doesn’t matter anymore in finance, investing, and economics. And there just may be a hint of informed sarcasm. As for speculating, if you are positioned long, stay long. Enjoy your paper profit ride, but don’t forget to mind your stops and make those profits real if needed. If you’re trading and miss the lack of real volatility, then now may be a good time to catch up on some insightful reads. Seriously, look at that picture up above one more time. Tell me that’s not exactly who my last post was describing. Cheers!

Step right up and grab your short opportunity

An interesting article was posted at ZeroHedge today regarding the rally in the stock indexes and how short covering is continuing to drive a fair chunk of results.  Any number of reasons can be attributed to this piece of information including the usual suspects of HFT’s algo’ing shorts from their money to the Fed is supporting equity prices to other central banks are buying US stocks.  Causations and correlations are always a funny business, but the graph does paint a unique picture.  The chart is the performance of the most shorted stocks over the last 6 months compared to the Russell 2000.

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You can catch the entire article(it’s very short) here.

That being said, if you’ve gotta a steel pair or are as dumb as I am, the following chart of Toyota presents what appears to be a good opportunity for a very short-term swing trade to go short.  I feel that Toyota is going to inevitably take out it’s all-time highs set back when everything else was at all-time highs, 2007, as the Japan trade still has room for a longer term melt-up.  For now though, momentum appears to be arresting in a final move before the let off of some steam.  Observe…

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Toyota appears to be forming a weekly blow-off top.  As the caption notes, look what occurred the other two times a blow-off move occurred on a weekly chart.  These moves occurred what now feels like 3 decades ago as far as trading action goes.  If the trading gods allow a normal move to occur as it would have in the old days, then Toyota should correct off of this move; potentially down to between $105 and $100 over the coming weeks or next couple months.  I placed that blue line under the caption to denote what should be a fairly strong support point under normal technical analysis.  I already made one attempt at this trade but was stopped out today.  I will be trying it again on the July $105 Puts.  Of course there is always the risk of a false signal as nobody is allowed to short the markets right now.  Take a gander at this chart below from the Price Action Lab, a great site for the aspiring quant.  Notice at the red circle what appears to be a blow-off top in the tech ETF, QQQ.  Making that same trade of purchasing Puts would’ve have easily stopped out an options trader going short in quick fashion.

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I point this out not to show that I’m scared to play the potential move in TM but to simply reiterate that it is a dangerous, dangerous time for one to fashion themselves a trader without the technological and potentially statistical tools that the biggest and most successful players are currently using.  The best way to play the TM “blow-off top” is to wait for a breakout to the downside for confirmation of the trend-break and then quickly position in the option.  Front running the move can yield upwards of 100% gains, which seems sexy until you’re stopped out.  Waiting for confirmation takes your ROI of the trade down significantly but it’s tough to piss and moan about only making 30% – 50% in less than 4 weeks.  I made the exact same play in XLU(utilities ETF) for a quick 45% in 3 days.  Of course, that now makes me 2 for 6 going short in 2013 which ain’t exactly my best work.

Keep in mind I’m just laying out a basic Put purchase position.  I’m not going to delve into complicated options strategies and start laying out straddles, strangles, condors, crosses, hippos, and moosesses.  That’s for the reader to engage in.  I’ll generally just throw out my interpretation of a chart’s potential and possibly a simple Call or Put purchase.  What’d you expect?  The site’s free.

Read, Read, and Read some more.  Good luck out there.