Risk is High
While it sounds like we're shouting into the wind, I have to say risk is high for multiple reasons.
We did do a good job of passing previous resistance of S&P 1420. We now approach the 200 day moving average, just about 1430. If the market blows through that point, then one must take the bullish stance I suppose.
Things that make me nervous
- Amazingly we are just about at highs for the year (within striking distance) - despite a housing crisis and credit crisis for the ages.
- All bad news is being ignored on hopes for the future
- We've now rallied essentially straight up for 2 months
- Retail stocks are the new darlings, one example JCPenney (JCP) 90 days ago was expected to do 80 cents in earnings... as the quarter went by analysts were slashing expectations and got expectations down to 50 cents. The company reported 54 cents so they "beat", setting off a fireworks explosion in the stock yesterday and the lemmings applauded. Even though they missed what expectations were not 3 months ago by 26 cents. They say the rest of the year will be a challenge. No one cares. Buy stocks. Same for Saks (SKS), same for Nordstrom (JWN), same for Kohls (KSS). These companies are now reporting negative earnings growth year over year, yet people are paying higher prices for this. Why? And for how much longer? Are these the new housing stocks that go up no matter what bad news? As long as you believe a turn is coming in the 2nd half of 2008 you can buy these and say "yes you must buy when it is darkest". I don't believe in that thesis.
- Commodities are ballistic. Look, I'm happy with it since we have some exposure there but some of these steel stocks and oil are parabolic. Just like fertilizer was 3 weeks ago when I went cautious. It is now out of the realm of sense and pure speculation in my opinion. Stocks like US Steel (X) now look like Potash (POT). I am very nervous about this group and am considering Ultrashort Oil & GAS (DUG) at least as a trade. Oil looks toppy to me here, and it is a most crowded trade...
- We are now seeing real implications from high oil, steel (more on that this weekend), and commodities onto earnings of producers. Yet no one cares. Buy stocks.
- The return of speculation in Chinese small caps. I am seeing some old favorites from last October now rising 30-40% in a day. When speculation fervor returns to the "worst of breed", my antenna go up.
- Gold suddenly woke up from comatose the last 2 sessions? hmmm....
- Complacency is everywhere.
While our short exposure helped us last week to beat the market by a wide margin, it has evaporated all our gains this week. As much as I like the fundamentals of the commodities, things are now at a level where (in the short run) they are making less and less sense from a valuation perspective. I will say this again - if commodities do continue to increase at this pace, even the emerging markets will be plunged into slower growth and/or recession. And that's been the bedrock saving us, along with the weak dollar. So at this point I've been wrong to turn cautious the past week or so, but I find risks to be very high, so I am holding my ground here. Again, this period reminds me of September/October 2007 when the market went to all time highs in the face of a deteriorating fundamental picture that it chose to ignore. The fallout after that was not positive. The higher we go, the more I am worried we might have a similar chapter ahead of us.
13 comments:
Mark:
I agree in general with this post, and this is something I have been saying for weeks: this rally is more due to unwinding of bearish sentiment; the rally has been on poor breadth; the rally was likely to end at or above the 200 d MA for the major indices. With inflation rising and sentiment now more bullish, these will be major headwinds.
For the record: 1) a "dumb money" indicator is close to bullish in the extreme; 2) a "smart money" indicator is bearish; 3) an indicator constructed from the trends in crude oil, gold, and yields on the 10 year is at an extreme reading indicating high inflationary pressures---this is a major headwind.
Now all these indicators and my analysis are meant to imply major headwinds for equities. But it would not surprise me to see markets higher in the short term. Why? Because that is how it works. Rarely does this stuff work right on cue. Usually the markets will question one's conviction while prices move adverse to one's position or belief.
What to do? In the absence of any improvement in breadth, I have been suggesting to my readership to sell into these daily rallies as it looks like the headwinds are starting to blow hard.
Guy, the problem is timing. Unfortunately being cautious the past few weeks leads to major underperformance. So we can be correct conceptually but wrong in terms of performance. So I've riden the "wave" the past few weeks, drinking Kool Aid along the way. But at this point it's beginning to reach the point of inane, so I'm going to change the tone a bit and allow myself to miss out on some of the moves from here, in return for more protection.
The markets always move in ways that frustrate the most people. I believe many people have been cautious and doubting the rally the past month, which in an intellectual level makes sense. Unfortunately this market is not full of intellectuals ;) I am beginning to see a lot of people I read/skim throw in the towel and go long. So as more do that, I believe the market will turn around and punish them. The level of frustration by that cohort is very high since they missed this move.
what is your website, I'll add it to my blog roll.
Mark
I totally agree with you...it is a matter of timing; in my world - where I try to quantify market factors - there is rarely accuracy.
The website is www.thetechnicaltake.com.
I am old school...no blog. I just try to produce good old fashion, innovative research.
Hey Guy,
Your name sounded familiar so I believe I've read your stuff over at RealMoney - been a subscribe there since late 90s. Name looked familiar. Nice to "meet you". It is funny how the world is circular in many ways - all paths sort of cross at some point.
Old fashioned, innovative research huh? Well that puts you out of sorts with most of Wall Street research which is just a way to say nice things to get investment banking business ;) As you know I'm sure.
I'll add your link - thanks!
Mark, what do you think about SMN? (at least as a hedge to ag/steel positions) Did it find its bottom at 27+?
Andrey,
I hold it as a hedge against my longs but I am getting my head handed to me on this position. I own it in personal account and here, and since I am a sucker for punishment I bought more today. But it hurts. A lot. :) One day it will reverse, and hard and be very profitable with the right timing. But so far I'm swimming with the fishes on this one.
Mark,
Are you doing anything with COW or still sitting on that 2.6% position? My question is...why is/will it taking/take so long for meat prices to catch up with the other ag stuff? Corn/grain and the other meat "inputs" have been going up for some time now, surely these increases should have started reflecting in the end-market price of meat by now??? I saw your previous post but still didn't quite grasp the reasons for the major lag effect.
Cut a little COW since it made a nice run here to mid 44s
I'll probably put it back in around 43 if it gets there or 42s
This wont really be apparent until later in the year or early 09 I believe.
There are a lot of cows in this country ;) remember that. Plus as people get poorer the demand for meats will also cut. People are probably already moving to chicken. I'd actually like to have a chicken etf. It sounds like chicken and hogs will actually go up first, and then beef later in the year. But this is a not a "fast money" play. It is sort like DBA last year - look at a 2007 chart. It sat for a while and then took off and made a huge run. Dont know if COW will have the same level of run, but it should have a significant move later into the calendar. Could sit here in a small range though for a few months.
Most of our corn goes into feeding livestock, not people. 2008 will be the year of corn. Wet ground and weather is still an issue and you can't plant corn late so by end of May we will know what the actual corn crop will be. It is not looking good thus far.
Your big brother (Coxe) has the opposite view of meats. He expects much higher meat prices across the board. Short term ranchers have been slaughtering livestock because feeding them is too expensive. That will have obvious consequences later. Meat is the one commodity that has NOT been going parabolic yet, and has some catching up to do.
I am long cattle futures for Dec'08
How is that opposite? I am long COW. That explains my position :) I just don't think it's going to happen tomorrow if people think its going to rise 20% next week or next month.
"Today" I believe you still have a glut of meat combined with people pulling back from more expensive products (aka meat)
"Tomorrow" I expect consumers to have still pulled back as they get poorer per capita but meat to rise substantially on basic supply/demand. And worsening as corn gets more expensive later in the year.
I am not sure how that is opposite.
if you click on the label for iPath Livestock you see my identical explanation as Coxe, in fact. Plus I told my parents to stock up on meat (freeze it) about 2-3 months ago ;)
Remember all the jokes about its going to cost a mortgage to BBQ on Labor Day?
Mark, I've still yet to toss up my cookies and go 'all in' long.. but I absolutely refuse to sell down what little 15% commodities exposure I have left.
I totally agree with you about chickens > pork > cows. I spent quite a while trying to find some way to get some chicken exposure, but the effort was fruitless.
Did you ever find a way to get rice exposure? I did find an Ag ETF that had some, but its weighting was around 10%, with a broad mix of other things.
I'm also thinking of MON again, as all this hording, export taxes, etc could really lead to opening up the products that MON offers. Add to that, the cycle back to corn shortages. Valuation is a little not great, on a relative basis to other ags, but that could quickly change.
Post a Comment