You know, when you write newsletters for a living, it's terribly easy to forget you have a blog. That said, we'll try to update with more regularity.
We Have Nothing to Fear But Good News
For some time now, we've been Bullish. We've done the battles with folks who think that we were crazy to be Bulls given all the bad news. "Real estate has a long way to fall!" "Credit cards are going to be the next shoe to fall!" "Commercial real estate is going to be the next shoe to fall!" "How can the market go up when Chrysler is going bankrupt and GM can't be far behind?!?!"
Whatever. I'm sure you've heard the litany, but the market is up. Way up. Why? Because all this bad news is what the market was discounting into last March. I mean, do you think that any of the big money guys are surprised by this news? Bad news has not been bad for the market over the past 3 months. Meanwhile, the liquidity that is in the market is massive.
Unless there are some big surprises, all this liquidity ought to be something of a floor for the market. It also presents a risk of inflation. From this point on into the near foreseeable future, this risk of inflation means that we need be far less worried about bad news and far more worried about good news.
There is so much liquidity out there that is looking for a home and if the economy looks like it's about to recover, the big money guys will bid commodities up dramatically. That will send the long bond tanking and the Fed tightening. It's that redirection of liquidity that will kill the stock market.
So, contrary to what most folks think, good economic news is not what we want to see, at least not a lot of it. Certainly, ongoing progress on the housing front will be welcomed and improved bank balance sheets will be a relief too, but much generalized good economic news will bring the commodity speculators out of the woodwork. It will also embolden the Fed to tighten too. Neither situation is particularly good for the stock market.
So, near term, don't fear bad news. Fear really good news. That's what will bring this mini-bull market to an end.
To get back to the Fearless Forecaster message board, use this link:
To follow our day trading and sentiment thoughts on Twitter, use this link:
ChartSmarts is also on Twitter and offers a FREEBIE!
You can also follow ChartSmarts on Twitter. Just go to http://twitter.com/ChartSmarts and select "follow" to get the latest comments.
ChartSmarts continues to offer its free 2-week trial. http://chartsmarts.com/free/
This publication beat the stuffing out of the market last year with just a tiny fraction of the risk. It's straight-forward and easy to follow.
I warned of a money market fund debacle and here we have it.
The Reserve Primary fund traded below $1 per share. You have to wonder why anyone would put safe cash into a fund that isn't government guaranteed.
Read the Crash Survival Kit post below for more on proper money market selection.
Wow! A Bear Market! That means that we're going down 10-20% from here, right?
No. Not so much.
A Bear market is just a condition. It has meaning, but it doesn't mean that the condition won't change.
The Bear market condition does not preclude new highs in the future, nor does it guarantee new lows. Certainly, the odds of new lows are increased, as with any down trend, but this condition isn't very predictive of future price levels.
Furhtermore, remember that EVERY major Bull market starts in the midst of a Bear market condition. Every single one.
What this Bear market condition means to us is that we have to view the market differently and expect different things in different context. For instance, bad news is much more likely to have worse than expected impact on the market. Long positions need to be less excessive because bad surprises are more likely. Short sales can be given more time to work out for the same reason. Stops are more important too, because preservation of capital is key. Additionally, sell signals that might have been whipsaws in a Bull market can be shorted.
One day, the condition will change and then the Bull market rules will be in play. As we approach that time (and we may be right now), investors should be accumulating stocks. Buying quality is imperative, too, just in case we're early and the economy is worse than the market is discounting. One thing to remember about Bear markets is that they wear out the Bulls so that they aren't buying at the lowest risk and most rewarding time. If we follow the Bear market rules, we're much less likely to be worn out and much more psychologically able to exploit the opportunities that are placed before us.
Here's a couple to consider:
A basket of Telecoms--most of them are beaten up.
BMY--pays a big dividend while you wait
NRO -- quality commercial realestate at a discount paying a huge monthly dividend
CSCO -- a big name trading cheap with improving fundamentals
INTC -- the leader of the semi's acting like it's a junk stock.
These are just a few examples. They aren't recommendations, but they are indicative of the type of things investors ought to be looking at. The principles are fairly simple. Start with good, valuable franchises, household names, businesses that you know and know to be undervalued, look for assets at a discount, big and reasonably safe dividends, widely understood problems or better widely misunderstood problems. Avoid complex businesses that you can't understand or that don't make sense. Be very careful with highly leveraged companies. Financial companies need to be very carefully examined. Hard assets good--derivatives and goodwill bad. Avoid focusing in any one sector overmuch and avoid lower quality issues. If there is an unexpected bad problem, the lower quality stocks are most likely to go away entirely.
Bigger picture, we've got more than enough Bearishness built up to generate a heck of a rally, perhaps to new highs. As such, it probably pays to try to be as constructive as possible and continue to add holdings as the market turns up.
After my past blog entry, I wanted to clarify my position. I'm not looking for a Crash. I'm not even a Bear (currently).
I have, however, been through a real crash and survived, and I've been through a number of other near or quasi- crash scenarios.
Because there IS serious risk in the current market and economy, it behooves us to at least have the tools and precautions in place, to minimize the damage should a potential crash become more imminent. Furthermore, things like proper cash management and security are simply good investment policy in general.
There are a number of folks who have been talking about a potential stock market crash over the weeks, so I thought I'd start gathering up the accumulated wisdom of 25 years of trading and investing. The working title for this piece is
"Are you prepared for the next CRASH?"
I'm going to try to "pre publish" this overall piece in sections here.
The first part is related to the most important basic--securing your cash. My philosophy is that "cash" is not an investment. It's a parking place for money before it finds a proper investment home. I do not advocate keeping most of one's assets in cash for extended periods of time.
Part 1: Cash is King
In the event of a market Crash, huge sums of money will be made and lost. It's entirely possible that a massive liquidity crisis could be triggered. Those who are positioned incorrectly could loose much or even all of their net worths, and financial hardship could even befall relatively conservative investors. Meanwhile, those who are savvy and prepared will be sitting on fat profits and ample cash to take advantage of whatever opportunities might be presented.
The first thing to remember is that in a market crash, Cash is King. A substantial portion of your investable assets must be kept as close to 100% safe and 100% liquid as possible. The exact percentage is for you and your trusted advisor to determine--the important thing to note is that many cash parking places aren't nearly as safe and as liquid as they seem. It is imperative that you do your own due diligence, because there are any number of hidden risks. Let's take a look at a few:
Banks- Bank deposits are only Federally insured up to $100,000. Anything above that amount is, at least theoretically 100% at risk. Moreover, if there is a failure, it is entirely possible that $100,000 amount might not be fully available to you for some time. The worse the crisis, the longer it may be. My conclusion is that in a crisis, a bank is not where you should keep your liquid investable assets. Certainly modest sums should be kept in more than one bank, or savings institution, but nothing too large. Bank runs have occurred--not just in the Great Depression but in 2007. That can greatly interfere with any asset protection strategy you might have.
Money Market Funds--This is the biggest, most unappreciated risk that otherwise savvy traders take. Most folks think that there is no risk in investing in a money market fund. In normal circumstances, of course, they are pretty much right. The problem is, the ONE TIME when you need absolute security --a Crash-- is the one time that the risk is highest. Money should be placed in the Money Market fund for absolute safety and liquidity. The real money is supposed to be made when we deploy the assets. Most money market accounts are not guaranteed by any government entity. They typically maintain their net asset value at $1, but it is entirely possible for that NAV to fall below $1. In fact this has happened just recently!
(see http://www.creditflux.com/digest/2007/08/0...in+subprime.htm ) With the sub-prime mess and mountains of ill defined derivatives risk, the risk of holding a standard Money Market fund during a crash is much higher than perceived. If you doubt it, ask Florida teachers (see: http://www.bloomberg.com/apps/news?pid=206...&refer=home )
Cash in Your Futures Account -- This isn't a big issue for many but it is important to note that cash in most futures accounts is not guaranteed by the government or even necessarily held as a segregated asset (separate from the brokers assets). If the futures broker fails, you may be an unsecured creditor. Don't leave large sums of idle cash in your futures account.
Cash in your Brokerage Account-- Most brokers insure cash balances up to 1,000,000 or more through outside insurers and SIPC. In a crisis, however, we don't know how well this will work. It's probably not a good idea to have large balances simply held by brokers and especially not just one broker.
I say, if you want to take a little risk to get more return, buy some of those closed end bond funds trading at a deep discount, or pick a target maturity zero coupon fund (though this would be better when the government bonds are down). Otherwise, don't go for above market returns with "safe" money.
In a credit contraction, when folks have been using leverage and massive derivative plays, there's all kinds of unexpected risk, including counter-party risk that could easily come home to roost at a Money Market fund that was positioned a bit too heavily in the wrong commercial paper, SIV, or other debt.
To my eye, an investor is not getting paid enough to analyze that particular risk and they won't be paid enough justify to taking it.
There's an old saw often trotted out by seasoned investors: Never reach for yield. It's the biggest (and oldest) sucker bet that there is. History is littered with the fiascoes of widows and orphans and retirees lured by supposedly "safe" high yielding bonds and deposit accounts. It is incumbent upon you, the investor, to evaluate the true risk of any investment. Don't take someone's word for it and don't be blinded by a big stated return. There's no such thing as a free lunch, so if the return is higher than average in a "safe" investment, then chances are the risk is also higher than average--probably much higher than average.
So, when Cash is King, diversify where you keep it so you don't have too much money at any one institution, and make sure that it is largely guaranteed and/or insured. U.S. Treasury securities are a good bet, as are government money market funds and modestly sized deposit accounts with Federal deposit insurance. Rember, this money needs to be available to you when there's panic and "blood in the streets". You don't want to wait until the markets have recovered to invest your cash, so it needs to be 100% liquid and secure during the worst case scenario.
Future articles will address various strategies and trading instruments to generate profits from a Crash or Bear market, how to identify a possible Crash scenario, how to reduce risk and the costs of errors, and how to identify a turning point and what to do about it.
Well, we've got some bad news for the Bulls (sort of). We are now technically in a "Bear Market". There is some good news, however.
The good news is that this change of status from Bull to Bear market is NOT a "Sell" signal. This shift merely means that based upon my objective indicators the context of this market has changed. We are more likely to be rewarded for selling early and shorts are more likely to work out, when we get sell signals. It's imperative to not be too Bearish just because the market's status has changed. It can change back quickly enough regardless and this tool was never meant to be any manner of mechanical timing system. It just changes how we trade our signals.
It's also important to note that we did not see the proper sentiment profile for an important top prior to this decline. Given that, the Fed's pumping of liquidity, and the time of year, this would be a great time for our Bear Market context shift to be reversed relatively quickly.
All we know for sure is that the next rally can probably be shorted when it peters out.
As many readers may know, we track activity on Traders-talk and we have found a correlation between extreme activity and turns. Now, sometimes this can be coincidental, but I'd say that often it's a good heads up. In any case, our Traders Talk Timing Tool (T-4) just got back up into signal Zone.
We've commented on this in earlier blog entries, for those who are interested in reading up on it.
I guess it only stands to reason that Bloggers would be the next group of market participants to poll. So, in a change of rolls, I get to be a participant instead of poller. I've been asked to become one of Birinyi Associates Tickersense Blogger Poll participants ( http://tickersense.typepad.com/ticker_sense/ ), and I'm happy to do it.
Should be fun.
If you're interested in some of my other thoughts on Traders-talk.com, the below link should take you to all of my topics outside of this blog and the protected forums.
It has been a long time since my last posting and I thought I had better do an update after that blistering rally out of "Weird Wolly Wednesday". So, with that, here's the poop:
The Bull Market is intact, as I have said for some time.
The Weekly trend is iffy after being down.
The daily trend is up.
Breadth should turn positive today.
Seasonality is negative. Statistically, next week stinks.
The sentiment picture is tough. I don't believe that we got enough on this last decline to fuel much more rally, but I could easily be wrong. I've got sentiment all over the map, but unless I see too many folks fighting the rally, I'll start looking for another sell off soon. No Bear, however. We are a long way from that.
I have over the past several months seen any number of traders getting all beared up over the rotten real-estate environment or some other litany of economic fundamentals. That's a bad mistake. Fundamental economic news does NOT drive the market. The market tries to forecast what the fundamentals will do, so you can't very well trade the market based upon past fundamentals. It's literally putting your cart before the horse. You can't possibly guess better than the market can.
In countering fundamentalist traders, a respected (highly) colleague of mine and participant here stated that he thought (and I am paraphrasing) that the market was irrational, and thus inefficient and much better suited to technical analysis. I'll agree that trading markets is something that requires technical analysis rather than fundamental analysis, but I had to disagree about the irrationality and inefficiency of markets. I thought I'd expound upon my comments to him here.
I'm an economist by education and a technician by trade. I've been doing fundamental and technical analysis, often simultaneously, for about 25 years.
My experience as well as considerable academic research lead me to believe that markets are remarkably efficient and they are largely quite rational generally. What appears to be irrationality is actually just the chaos created by thousands of really smart people (and probably millions of pretty unsophisticated ones with less money) trying to rationally allocate assets for maximum profit.
Now, I'm not saying that markets are perfectly efficient. I'm also not saying that market participants don't behave in irrational manners from time to time. In fact, this happens with some regularity, but not all the time. Most of the time, prices are highly correlated with economic reality, once you smooth out the trading volatility over time. Those big ("irrational") extremes in trading that we see are usually due to some exogenous factor that dwarfs the fundamental economics of a situation. For instance, we'll often see a really good company sell down not because folks don't want to hold it, but because those folks had a margin call. Or if a fund with nothing but nervous nellies as shareholders, suddenly got a ton of redemptions they might have to liquidate many of their more favored holdings, forcing their prices down. Such things create uneconomic or "irrational" (if you will) trading decisions.
It's just those things that people like me are looking for.
But that doesn't change the fact that by and large the market is efficient. Positive or negative developments are discounted well in advance of any clear news in most cases. The stock market is so efficient, in fact, that an amateur fundamental analyst is rarely going to be able to TRADE the market profitably on fundamentals alone; there are smarter and better informed folks out there ahead of him competing away the economic edge. In the end, the amateur trader will be buying the great earnings announcement, right before the stock sells off.
There's a reason why Wall St. has the old adage, "Buy the rumor. Sell the news".
We've got a T-4 Signal. I think it may be a Sell. I also think that I misread the last "borderline" Signal.
Our T-4 Turn Indicator went out at 83, which is a signal. I was thinking that we might have had a repeat weak Sell last Thursday with a 76 reading, but that is clearly not the case. That was a Buy to reverse the weak Sell on December 19th. If my read is right, and I now think it is, then we have to take the 83 reading as a Sell. Typically we want to see readings above 80 or higher before we look for worthwhile turns. This indicator doesn't catch every top and bottom, but it is a great "Heads up!" indicator.
We have more on this indicator below in earlier postings.
Interested Traders-Talk users should contact us or search the Fearless Forecaster message board for a download of all historical data for this indicator.