HOME OF "PICTURES OF A STOCK MARKET MANIA" May 19, 2010
Alan M. Newman's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
Excerpts from our May 17th issue
Rationales & Targets
Last time out, we admitted we had been wrong for far too long, “…but this time, the top should be in.” And it was. Prices tanked immediately thereafter and in the case of the Dow, actually (albeit briefly) made it all the way back to the February lows, which we had also correctly pegged as our short term downside target. Although we appear to be somewhat in the middle between “upside potential” and “downside risk” (see short term forecast at right) right now, the odds for downside risk probably outweigh the odds for upside potential at least two-to-one, thus we believe any upside play at this time is way too dangerous. We could rally at any point simply based on nominally oversold levels achieved Friday, but our principal concern is a perfect storm is brewing, one that can kick stocks while they’re down. Gold seems destined to supplant all major currencies as more insurmountable sovereign debt problems surface in the weeks ahead. The story is not yet complete. For all intents and purposes, we view the recent action in gold as a game changer. All the more interestingly, fear has yet to put in an appearance. We believe it will.
SPECIAL SHORT TERM OFFER
YOUR COST IF YOU RENEW FOR A YEAR = ZERO! Flash Crash
The May 6th “flash crash,” wherein the U.S. stock market inexplicably collapsed in a matter of mere minutes is in our view, absolute verification that the arena is horribly broken. The system simply does not work anymore. We have swapped an investment arena ruled by open and human controlled auctions for a trading casino ruled by computers and invisible bids and offers (see our many references to “dark pools” over the last year and change). In the former, value is paramount. In the latter, value is relatively meaningless since holding periods may only be hours or minutes and perhaps even seconds.
Is it pathetic or amusing that SEC head Mary Schapiro has commented that the SEC has no clue how this happened? We’d say both. No one knows and although many guesses have been hazarded, no one but no one is willing to hazard a guess that PERHAPS optimism rose to a historic extreme and that PERHAPS stocks were overvalued. As far as your Editor is concerned, you can strike “perhaps” since we are certain that both the conditions of extreme optimism and overvaluation existed at the April 26th peak in price.
The removal of human involvement and interaction has been significant and as a result, price is typically only a momentary consideration. Trading on a very short term basis is thought to mean minimal exposure. Supposedly. Realistically, once the arena is saturated with presumptions of minimal exposures, it is also saturated with risk. In this case, since holding periods are minimized, there isn’t even time for trading entities to be concerned with details, such as valuations.
Simply put, if it is possible for 512 Dow points to be erased in the span of only four minutes as occurred on May 6th, then there is no way for investors to make rational decisions. The four minutes lopped $743 billion from total stock market capitalization. How rapid was the flash crash? At the same pace, it would have only required 80 minutes for stocks to reach zero. In our view, the establishment of new “circuit breakers” changes nothing. Stocks have become commodities and investing, for all intents and purposes, is dead. The best evidence that stocks can reverse upwards for any length of time will be when bears multiply like rabbits and bulls disappear like the dodo. We’re not holding our breath.
What is even worse is that there is seemingly no explanation for what occurred. What does that tell you about the U.S. stock market? Since 1987, we have suffered quite a few instances of totally bizarre situations that are so many standard deviations from the norm that each would be expected perhaps once in a thousand years, if that often. The 1987 crash, the LTCM fiasco, the tech bubble, the derivative fraud that caused the 2008 meltdown and now, the flash crash. None of these events were ever supposed to occur in our lifetime. They all have.
Worse yet is the explanation that has surfaced of a lone trade (see http://tinyurl.com/3y36adc) involving 75,000 “e-mini” contracts by Waddell & Reed Financial Inc. during a twenty minute period on May 6th. If true, this would act as further proof that investors are screwed no matter what they do. If not, the fact that there is no explanation serves the same purpose. How ironic. The salient fact is that investors are screwed either way. The U.S. stock market has been completely and irrevocably hijacked by technology; investors need not apply.
No Love Shown Here
From time to time, we attempt to take the pulse of a sector or industry through the activity of corporate insiders. This is definitely not a timing indicator since the market typically lags insiders and our intent is simply to illustrate the value of said sector or industry. It’s been awhile since we checked in on the top issues comprising the Powershares QQQ (symbol QQQQ) and we’re not surprised by what we see. The last time we checked was back in January 2009 and Nasdaq was already well on the way towards the bottom, down 41% from the ’07 highs. We only monitored the top eight issues, since two of the top ten (Teva Pharmaceutical—TEVA, and Research in Motion—RIMM) are foreign companies and insider data is not available. There were a grand total of 250 sellers against four buyers, a ratio of 62.5 to 1. There were 47.7 MILLION shares sold and 97,000 shares bought, a ratio of 490-1. It’s worse now.
In our May 10th tally, there were 231 sellers and only three buyers a ratio of 77 to 1. Shares sold were 59.8 million versus only 15,200 purchased, an astounding sell/buy ratio of 3933 to 1. So few shares were purchased that our chart is not capable of displaying the buy side. While the stats are nowhere near depressing as they were at their record worst, for our March 2008 tally, they are clearly indicating a lack of faith by corporate insiders. If their shares were worth holding onto, the assumption is they would hold onto them. Yes, the “Qs” had been en fuego for the longest time but then again, it’s about trading and it’s about glamour, and not at all about value.
Perhaps most interesting of all, analysts are roughly just as positive on this group as they were back in March 2008 before a 37% collapse in price. At that time, 74.1% of recommendations were “buys” or “strong buys” and 2.9% were “sells” or “strong sells.” As of May 10th, 77.7% of analyst’s recommendations were buys/strong buys and 3.6% were sells/strong sells. We do not see this comparison as good news for the top issues of the QQQQ.
INTERESTED IN PERSPECTIVES YOU'LL FIND NOWHERE ELSE?
ENROLL IN OUR FREE TRIAL. NO OBLIGATION.
WATCH THIS SPACE FOR MORE COMMENTARY ON JUNE 9th.
WHY NOT REQUEST A FREE TRIAL?
Powerful Commentary. Unique Perspectives.
ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published roughly every three weeks and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
Subscription rates are now $189 for one year and $100 for six months. A FREE 3 issue trial subscription is available by emailing us (click the "free trial" link above). Please note: trial requests must include name, address and phone number and must originate from the email address the trial is to be delivered. Trials are only available by Email (.pdf files). U.S. Mail subscriptions are available but include a nominal surcharge for postage and handling.
