As I wrote in the last entry, it would be poetic justice in some ways for mother market to have drawn in the last remaining bears, forcing them to throw up their hands and go long - just as she was about to drop the hammer. Could it be that dramatic? We'll soon see if historic precedence means anything anymore. If so, these 2 intraday reversals are a shot across the bow.
Ah mother market... she is wonderful in her pain allocation isn't she? Sucked in many of the last exasperated bears who have been hammered for weeks on end on that very brief push over the 200 day moving average, before taking a 3% sledgehammer to their cranium. Now, 4 days later, we appear on the edge of a potential breakdown; the bulls need S&P 1380 (50 day moving average to hold). As I wrote earlier this week, I expect this level to at least provide a "bounce" (which I won't trust) so in a general sense this is what I've done. I've lowered my short exposure down from around 27% to 20% late yesterday and this AM, expecting this 1380 to provide at least a (minor) bounce.
Here are potential moves from here.
On a break below this 1380 level, I will reacquire this short exposure I just let go - a breach of 1380 on a closing basis would indicate to me we have some serious downside ahead.
On a move up from this level (bounce), I will reacquire this short exposure - I don't believe in any bounces and think the market is living on borrowed Kool Aid. As the evidence starts to become clear to the wayward bulls that their 2nd half recovery, housing recovery [AP: Unsold Homes in US Rise to 23 Year High] , and all that nonsense is a joke we'll begin to see capitulation. But it could happen after a bounce, and not right away. Remember, every bull in this market is conditioned to short, sweet, cute recessions - the playbook says buy 3 months in because the Federal Reserve is all powerful and their flooding of the globe with currency (while creating bubbles) soothes the stock market. They do not realize this is the first consumer led recession since the late 70s/early 80s. ONLY when the evidence is so overwhelming will they cry Uncle. And sell stocks.
If this market were trading on reality I believe it would be 15% lower (at least). But Kool Aid is
strong with young Skywalker. As I write this the market is around 1379 on the S&P so if we see a continued breakdown later into the day I'll be getting back my short exposure I sold off the past few hours.Cash is 32% but that is because I lightened up short exposure quite heavily here - I'll move about 7% of that from cash to short exposure if we see continued weakness into the day. Risk is High - all bounces are suspect. All purchases on the long side will be small in scale for the near term. I need much lower prices on MOST of my favorite names to really be buying in scale. I continue to hope for a large scale commodity selloff, which would kick us in the groin in the near term, but I want lower prices to build positions back up.
Short Kool Aid
3 comments:
About time for some Kool Aid hangover! Been waiting for this pullback for 2 weeks. Got stuff I need to buy...
Well Mark, what do you feel is fair value for the S&P and DOW given the two greatest multiple contractors are present, recession and inflation, and the market is not facing reality yet even at S&P- 1370s and DOW 12400s.
Although the US economy is a wreck, many stocks, especially DOW components don't rely on the US for majority of growth, and US dollar is weak so oversea sales increases will make up for domestic sales falls, but the weak dollar is inflationary (whether it be the cause or effect of inflation, or both) so the higher nominal sales and therefore profits make many stocks, indexes move higher, but it is because of inflation.
What I am saying is I expect profits to grow for next few years, but the markets will not offer investors and significant REAL returns above inflation.
As of now I am looking for DOW 11500-12000 and S&P 1300 range to really start buying bull market stocks like, oil/coal/AG,etc. and not worry about any market correction taking the down lower.
Do you have a fair value estimate for the indexes?
Bill, it is sort of a moot point to have a target on the indexes - we are like lampreys on the side of a shark/whale. Where the whale goes, we follow. Even if we think the whale should go somewhere else.
I do agree with your comment about inflation and I have written many times in the blog - if your stock returns are 8% in a 13% inflationary environment you really are losing 5%. But since stock returns are easily measurable (the 8% gain) whereas inflation pain is not easily measurable AND/OR told to us is far lower (by govt) it is to the advantage of powers that be to keep stock markets elevated with easy money, since that is what people pay attention to and is the easier measurable figure. THis is why all these people clapping during the rate cuts all fall, and winter I was constantly writing in the blog - you will pay for this in your grocery line, gas line, home heating, etc - no free lunch. So what we "benefit" from in our Etrade account due to funny money flooding the system we pay for in all other places. And frankly its a very sinister situation because those at the top of the food chain (upper 1/3rd) benefit because they actually have 401ks, individual stock and mutual fund accounts to offset the higher costs of life. Those at the bottom only have the pain of the higher cost of life, they do not have Exxon stock to offset their food/gas etc costs. So its a sad thing, inflation is truly the most regressive tax, but if you choose between inflation or deflation the powers that be will always choose inflation since it hurts those without assets whereas deflation hurts those with assets. And we know who matters in this country - those with assets have the say.
I do agree on the multinational story and hence this is why my Ultrashort for the broad index has been the Russell 2000 - multinationals will continue to do better on a general basis but if the world slows under a high inflation environment, the last bastions of relief for the US stock market (overseas profits) will also suffer. There will be no shelter in the storm. Frankly almots every thesis is now dependent on China continuing to subsidize every purchase at any price. We'll see how much longer they can do it.
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