We know that 'stocks climb the stairs on the way up, and take the elevator on the way down.' Why is that the case?
Fear trumps greed.
The best illustration I can think of actually occurs in the context of price spikes. The most violent rallies are driven not by boarding investors, but by exiting shorts. It's possible to argue that recent gains in stocks like TSLA and NFLX were entirely the result of successive short squeezes.
Is the (US) market headed south? No one knows for certain, but I can outline several reasons that make a decline the high odds bet.
(a) Trapped bulls. The percentage of assets in bullish Rydex funds (a fund family often used as a proxy for trader sentiment) hit a new high on Tuesday. The most likely reason? (Reflexive) buying of Monday's dip. Below a certain psychological threshold, underwater portfolios will exhibit a 'reverse short squeeze' effect. A -5% hit? No worries. -25%? Most investors start to worry- and sell at market bids.
(b) Running stops. You don't think market makers will run stops in order to maximize profits? Veteran cops don't believe in coincidences, and neither do veteran traders.
(c) Profit warnings hit home. How much longer can companies report record profit margins before mean reversion kicks in?
(d) Bad news? It begins to matter. In most cases, the 'news' will not have changed (and in fact, most financial 'news' is priced in long before any media prints). The same information is simply interpreted differently (ie, in a different context).
(e) Seasonality. Sell in May.
None of the above is a given. But trading is based on probability, and investors tend to exhibit the same emotional patterns time and again.
Rather than sell the remaining half of my position in HDGE, I added to it at the close.
ReplyDeleteProbably a mistake. But one I can sleep with.
DeleteI know a lot of traders will disagree with me. But we each have our own views, ones formed over a lifetime of experience. My views change from day to day. And I trust myself to exit positions quickly when I'm wrong.
ReplyDeleteI'm not advocating 'short and hold.' We all know short squeezes come of out left field when least expected.
ReplyDeleteNikkei under 14k.
ReplyDeleteI may turn bullish as early as Friday morning. We need retail investors to throw in the towel. Many, if not most, will learn the market sold off only on the way home. Let them sell at the open on Friday, or on Monday. Then buy the shit out of TSLA, NFLX, GOOG and IBB.
ReplyDeleteGreat timing on HIMX, as usual.
ReplyDeleteThis market is all about frustration. (Well, when is it NOT about frustration?) Look at Australia, New Zealand, South Korea. Elevator down, elevator up, elevator down.
ReplyDeleteFrom the TD Quant Desk. Would be nice if I could post the diagram, but still a good description of what I think is going on in this market:
ReplyDeleteIn Exhibit 1, we detail the historical market rotations through a cycle. While past
cycles are never identical and the duration and amplitude of the various phases
differ, we believe that the overall market does move through the three major
phases. The early phase recovery (2009–2011) gives way to a mid-cycle slowdown
(2011 to present), followed by the late-cycle re-acceleration, re-inflating phase. For
the past three years, we would argue we have been in an extended mid-cycle phase
characterized by slow global growth, low inflation, and low interest rates.
Aggressive growth stocks (primarily small-cap and mid-cap) outperform through
this phase. However, the interest rate cycle may be slowly changing with shortterm
U.S. interest rates beginning to rise. We may need to consider positioning our
large-cap and small-cap model portfolios towards the late stages of the cycle. This
would involve a style rotation away from aggressive growth stocks towards growth
at a reasonable price (GARP), and a size rotation from small-cap to large-cap. We
believe that low inflation and slow global growth will likely make this a very
methodical rotation. These macro conditions also suggest that it may be too early
to make an aggressive sector rotation into the late-cycle Resource sectors, which
will likely require a global re-inflationary scenario.
While the above thematic rotations take a longer-term view of the market, we
believe that the market could make a defensive rotation in the short term. With
interest rates beginning to increase, earnings momentum should take on a greater
role in determining relative performance. From our perspective, earnings
momentum is still relatively weak and, as such, could lead to a less-than-positive
reaction to upcoming Q1/14 results. This would also be consistent with the
technical pattern for a Q1 rally giving way to a Q2 pullback or consolidation. It is
also worth noting that we witnessed a sizable U.S. mutual fund rotation late last
month into bond funds from equity funds. This could be a negative trend for stocks
if it were to continue. Overall, these conditions should favour more defensive
GARP stocks.
Damn BB. I'm honestly not smart enough to really get this. Can you dumb it down for me?
Delete"rotation away from aggressive growth stocks towards growth
Deleteat a reasonable price (GARP)"
I think this means low p/s
Wouldn't it mean a low P/E?
DeleteSorry, you mean Price/sales right?
DeleteYes, price/sales but I'm sure there's more to it than just that, such as debt and actual growth.
DeleteVE - P/S is a mere 0.31 still but they have some debt that needs refinancing at some point?
ReplyDelete1750 seems like a fairly reasonable target, we should probably be short at this point.
ReplyDeleteI agree we probably should be short. I just don't have the heart in it right now if that makes sense. It's exhausting.
DeleteWe are pretty oversold, a bit late to short now, but the market will do whatever screws the most people, so damned if you do and damned if you don't.
DeletePKX - Wow, I really had no expectation PKX would run like it did, sorry I can't read a balance sheet guys maybe I coulda talked us into it?
ReplyDeleteANGO - No wonder this thing moved so much during today's session, earnings were scheduled for AH
ReplyDeleteMark,
ReplyDeleteWhat TD is saying is the economy moves in cycles and so do the best stocks for that cycle.
The last couple of years have been favourable to Aggressive Growth Stocks.
The next couple of years, we should see the economy grow faster and the stocks that will do best larger companies and GARP stocks. GARP (growth at a reasonable price) stocks are the in-between stocks, not the high-fliers and not the beaten down value. A lot of the Warren Buffett type stocks are GARP stocks. Think MSFT - trading at fwd p/e of 13, but growing at a steady 10% per year.
They are also saying is is too early for the resource stocks, which are even later in the cycle.
Finally, they say it is reasonable we could have a pullback / consolidation around Q2 while this change in the market takes place.
This is, of course, all very broad and will take time, but I'm pretty sure it is correct.
It will be interesting to see how far the fear spreads, these high growth stocks buy products from MSFT, don't they?.
DeleteDudes. Start your engines.
ReplyDeleteI think something more sinister is going on. China crash? Is that priced in? Then again I'm prob overreacting. I think we see a 25 or 30% correction in small caps maybe 15% in big caps
ReplyDeleteKyle's chart is probably reason enough?
Deletehttp://content.screencast.com/users/KMM/folders/Jing/media/e25f7695-36c5-40d0-83a9-c432accf8d8d/SPX%20%281981-2014%29%20PFork-FibLvls.png
I've never bought into charts like that. Some traders manipulate those charts to fit their views. Some are logarithmic some are linear.
DeleteThe main concern I have is people are conditioned to buy the dip. Why do u think the put call ratio was the lowest in past year on Wednesday? That kind of thinking needs to get eviscerated and I think it could take longer than we think. I would be shocked to see the mkt go between 1750 and 1880 for a while to keep bulls hopes alive
Sorry meant to say I wouldn't.
DeleteBest part about market tho is we all get humbled from time to time and I'm ready to be humbled yet again
Baltic Dry Index (BDI) -27 1002
ReplyDeleteJPM - Not so good?
WFC - Not too bad yet?
BB- thanks. Why they don't just phrase it like that is beyond me
ReplyDeleteIf you're an analyst, you can't make it too simple or they'd think you weren't doing your job
DeleteMy two GARP stocks seem to be doing fairly well.
ReplyDeleteCBOE - BACML upgrades to buy.
BAS is kickin' ass....
ReplyDeleteTZOO..Hmmmm
ReplyDeleteI was watching a couple of analysts on the tube last night and one made some sense, with the bid for bonds and continuing low interest rates, the bond vigilantes are saying stocks are overpriced and there is rotation to defensive issues, which the charts confirm.
ReplyDeleteI got an interesting post from Twiggs last night citing the S&P chart, but I think the S&P is masking the broad market weakness. This is NOT just momentum stocks, it's everything. Yesterday's sell off was very broad with the exception of the toy and hobby "group" which is ONE stock. PM's got a bid, the dollar resumed weakness (hence the bond strength). However, we are pretty wildly oversold so expect the mother of all rallies to suck you in. I think 2nd made a good case.
Sold my TUR - up almost 20% in less than a month, so one of my best trades this year so far.
ReplyDeleteJust hard to set a target price on a country ETF, and after a rally like this, would seem to be ready for a rest. I don't mind holding through pullbacks if I have a good idea where I think it will go, but harder to do with stocks like this, so just figured sell now and maybe reload if it makes sense.
20% is huge bro. Great trade!
DeleteNice!
DeleteWide has been resting this morning so I had baby duty. Traded tza three times while she was napping in my arms. Pretty ridiculous but I'm now 11 for 11 in my trades with tza this week. Ridiculous. I bumped my ytd gains back up to +9.5%. Taking break for rest of day have a great weekend guys
ReplyDeleteHaha - maybe she is you new good luck charm. Good work either way!
DeleteI'm outta here too. Some of the golf courses are finally opening around here. Latest spring opening in at least 30 years.
Careful with the nickname 'wide'. Girls are sensitive about that.
DeleteHa from the typo king himself!
DeleteAccelerating
ReplyDeleteToyota?
DeleteVrooooommmm! :)
DeleteDJIA currently -132 (-0.84%) @ 16035. NDQ -55 (11.36%) @ 3999 (under 4k!). SPX -16 (-0.9%) @ 1816. EEM holding up relatively well, down -0.11 (-0.25%) @ 41.72.
ReplyDeleteClosing HDGE @ 13.21 (+1.69% for the day, or +3.9% for the trade).
I'm now turning bullish! My suspicions are that traders will not want to be holding over the weekend, which may lead markets to close near its lows. Will be going long both EM + US end of day!
QQQ @ 84.15...
DeleteFXI @ 36.20.
DeleteSLW @ 22.29.
Hmmm. I was just about to ask if we were buying anything into the weekend.
DeleteI like the balls. A gap up most likely will be faded though. I don't see any way that the Russell avoids a retest of the feb lows around 1080. I'd like to see a gap up for another trading opp
DeleteRYWVX (Emerging Markets) + RYOCX (Nasdaq 100) + RYEUX (Europe) at the close.
ReplyDeleteWide, LOL! :)
ReplyDeleteAMZN - Closed the Oct. gap up today, didn't it?
ReplyDeleteGuys the market never goes down in april. Rally on Wayne rally on
ReplyDelete