There is no direction in this market. Tod the spooz traded in a tight range. Both our longs and shorts worked for us. As we take a look at the bigger picture and evaluate the broader market, we have no evidence of a big move. There are plenty of questions that still need answers such as; where are rates headed, what will happen in Egypt, will there be anymore quantitative easing. With these unanswered questions ahead of us, one would speculate we will eventually pullback. For the time being we still remain to grind higher. But when the pullback comes, it will come fast and hard. Take a look at our CEO Jeremy Frommer’s blog; 10 Reasons The Stock Market is Delusional, for further conviction of a pullback.
Category Archives: Stock Market
10 Reasons the Stock Market is Delusional
A Delusional Market:
1. Leverage is a good thing. There is too much leverage in the market…Again. We are in a dangerous place.
2. Rates have moved up a bit, they wont move up more. Even with the move in rates, they are too low.
3. Equity multiples are low. We have seen no contraction of equity multiples. One of the greatest delusions in the market is that companies can continue to expand margins. Dell beat on earnings, not revenues. That is the theme of this earnings season. Rates will eventually force multiples to contract.
4. APPL can do no wrong. Yes they are great innovators. But the competition that is growing around them is being ignored.
5. An M&A cycle is coming. I believed in this as well. It has not materialized. And now stocks are no longer cheap. Many of the private equity groups I speak with say they are not making new investments. They are still waiting to exit a large backlog of old deals.
6. Banks are in much better shape. I don’t think so. Investment banking is light and the days of incredible proprietary trading profits are behind us. They are still saddled with terrible mortgage portfolios that will only continue to be difficult to unload as the homebuilders like LEN TOL and RYL rush to build while rates are low. Neither will win as demonstrated by the homebuilder’s inability to break through technical resistance.
7. Jobs are coming back. There is a wave of hiring ahead of us. We have actually passed the period where you would have expected to see this. There will be a flood of new people desperate for work and willing to work cheap as we hit may and June and a million seniors graduate college. 100s of thousands of Lawyers will take temp work to survive. And the majority of MBAs still don’t have their jobs lined up. Let alone the amount of high school seniors who will graduate, unable to afford college, desperate for blue-collar work that does not exist. Even worse many will sign their lives away to student loans they will be paying off decades after they graduate.
8. NFLX will dominate the streaming video space. Forget it. Eventually Google, Amazon or Apple will go head to head with them. Studios will jump ship, as they have never been fond of the beating they took during deal terms with Netflix.
9. Oil is going to 100, and this is a sign of an improving economy. What? The last time oil behaved like a rocket we wound up in the worst financial crisis since the great depression.
10. And the #1 reason the market is delusional and will be selling off soon is that I covered the majority of my shorts.
Hedge fund live vs. Hedge Funds
I want to know where my money is invested
Put us up against any other hedge fund and the one guarantee is our transparency. Four times a year, US securities regulators require fund managers to disclose their stock holdings. At hedge fund live, at any given time, your are able to view any of the traders portfolios, as well as watch the trading desk. I have mentioned this in a previous blog, that hedge fund live is truly innovative.
Mid day recap for Day Trade Well P&L is positive!
Could This Rally Possibly Take Us to 1498 on the Spooz?
I am taking a quick look at how powerful rallies have been in the past decade. For this market study, I am defining “rally” as monthly gains before getting a 2% or more pull back. So I am using a monthly time frame for this analysis, but a similar one could look at a weekly or some other shorter time frame. The following chart lists all such instances when there has been a rally and how powerful that rally was (what I refer to as the “magnitude” of the rally). Note that I am using the S&P futures for my data.
| Date Range | Magnitude of Rally |
| Jul-10 | 6.99% |
| Feb-10-Apr-10 | 10.24% |
| Mar-09-Dec-09 | 42.87% |
| Apr-08-May-08 | 5.73% |
| Aug-07-Oct-07 | 6.26% |
| Mar-07-May-07 | 8.57% |
| Jun-06-Jan-07 | 12.75% |
| Nov-05-Apr-06 | 8.52% |
| May-05-Sep-05 | 6.45% |
| Feb-05 | 1.88% |
| Aug-04-Dec-04 | 9.89% |
| May-04-Jun-04 | 3.10% |
| Mar-03-Feb-04 | 31.60% |
| Oct-02-Nov-02 | 14.35% |
| Mar-02 | 3.82% |
| Oct-01-Dec-01 | 9.91% |
| Apr-01-May-01 | 7.53% |
| Dec-00-Jan-01 | 3.87% |
| Aug-00 | 5.72% |
| Jun-00 | 3.22% |
| Mar-00 | 10.44% |
Below are some basic stats around the magnitudes:
| Average | 10.18% |
| Median | 7.53% |
| Max | 42.87% |
| Min | 1.88% |
Now we are clearly in the midst of a rally, one that, according to my definition, began in the beginning of September 2010. Since September, the Spooz are up 26.7%, which is significantly higher than the average and median magnitudes. In fact, there have been just two instances when the rally was greater than the current 26.7%- the one that lasted from March 2003-February 2004 was a 31.6% rally while the one that lasted from March 2009-December 2009 was a 42.9% one. Note, however, that the former was 11 months and the latter was 9 months in duration. Let’s assume the extreme case here and suppose that we do see another rally that is 42.9% in magnitude. That would put the futures at roughly 1498. And any pull back would be less than 2%. That seems a bit much, but you never know. So let’s tone it down and assume a 31.6% rally like the one we saw in early 2003 until early 2004. That would bring the Spooz up to 1379.50. Ok, a little more within reach. Either way, this look back study is just a reminder that rallies even more powerful than the one we are currently seeing have happened in the past- twice in the last 10 years, to be exact. So I wouldn’t be so doubtful that this rally could slowly take us up another 50 points even.
Huge Pull Back Likely Won’t Happen Monday
The action in the Spooz so far today reminded me of a blog that I had written on Jan. 14, 2011. I had run an analysis on Round Trip days. A “Round Trip” is a HFL coined term that means a name has moved from below S4 to above R4 or vice versa (R4 down to S4). We saw this action on Jan. 14, which happened to be a Friday like today as well. Here are the updated stats for what occurs in the market on the day following a round trip up (S4 to R4):
| All Days | Fridays Only | |
| Next Day Pct Chg Input | 0.00% | |
| Upside: Next Day Pct Chg Input | 1.00% | |
| Downside: Next Day Pct Chg Input | -1.00% | |
| Number of Instances | 120 | 16 |
| Number of Up > 0% Next Days | 64 | 7 |
| Number of Higher High Next Days | 86 | 10 |
| Number of Lower Low Next Days | 16 | 4 |
| Number of Up More Than 1% Next Days | 13 | 2 |
| Number of Down More Than -1% Next Days | 20 | 0 |
| Number of High Above R4 Next Days | 27 | 4 |
| Number of Low Below S4 Next Days | 41 | 5 |
| Probability of Up >0% Next Day | 53.33% | 43.75% |
| Probability of Higher High Next Day | 71.67% | 62.50% |
| Probability of Lower Low Next Day | 13.33% | 25.00% |
| Probability of Up More Than 1% Next Day | 10.83% | 12.50% |
| Probability of Down More Than -1% Next Day | 16.67% | 0.00% |
| Probability of Ticking Above R4 Next Day | 22.50% | 25.00% |
| Probability of Ticking Below S4 Next Day | 34.17% | 31.25% |
The blue font denotes input parameters for this model. The bold font denotes the output of the model.
Round trips where the Spooz have closed in the green have occurred 120 times since Jan. 2000, or roughly 4.2% of the time. Out of those 120 days, 16 of them were Fridays (like today). The probability of the market closing up on the following day is 53.3%. The probability of making a higher high though is 71.7% while the probability of making a lower low is 13.3%. The probability of the market ticking below the S4 pivot level on Monday is no more than 34.2%. So all in all I would not expect a huge sell off. Similarly, the odds of the Spooz closing down more than 1% are low, 16.7%. Actually, if the round trip up occurs on Friday, we have never since the year 2000 seen a down more than 1% Monday. Combining the relatively low probability of making a lower low (13.3%) and the low probability of a down more than 1% close, I have to anticipate a down day, but down small, to kick start next week.
YUM
Overnight we held 1000 shares of YUM(owns KFC Pizza Hut and Taco Bell). During the morning trading we added into our levels down to about 49.14. Throughout the rest of the day the trade continued to work for us on a slow grind up. It was great to see how a trade like this plays out. What I learned is sizing into a positon is important ie: if we would have purchased all the shares at once we would not be able to by at lower levels, if we sold it all too early we would not have profited all the way up. As each day goes by the more excited I am to get on the keys and enter my first trade.
The Way We Were: One Year Ago on Feb. 10, 2010
Let’s rewind back to exactly one year ago on Feb. 10, 2011 and see what our Chief Market Strategist Jeremy Klein had to say on that day:
Shhh…. I’m Sleeping…
Yawn. My apologies for falling asleep during market hours, but with the snow accumulations accelerating and the Bernanke news on how to unwind the $2 Trillion liquidity bubble digested in the marketplace, there is very little left in the day, save a 10YR Treasury Note auction at 1PM to move the needle. I am of the ilk, and certainly recent volume statistics have bore this out, that a quiet day usually suggests a flat to upwardly grinding market.
The Spooz did bounce of the 10:30 AM lows admirably following an up trendline like a staircase. Potentially, the most notable market machination of the day is the relative strength of the Financials, easily outpacing the rest of the other 9 industry groups in the SPX. The strength in banks, the only green industry group on the day, is threefold significant. First, it is the #2 weighted sector in the blue chip index. Second, it is, by far, the most influential industry such that its movement up or down has a decided effect on the rest of the market. Finally, and most importantly on a day such as today, while the rest of the market sold off on the Bernanke text, Financials, the group of stocks most affected by his words, held in quite well. That is, the “smart guys,” who understand what is coming out of the Fed better than the “dumb guys” trading other sectors less affected by the Chairman’s words, are signaling that what was said will not be too onerous for the economy or stocks in general.
As the market continues to grind higher, some key levels on the upside in the S&P futures continue to be 1072.50, which is the overnight high, and 1077.00, the spike up high after word came out of Europe yesterday that Greece will at a minimum get loan guarantees out of the EU and Germany. With the weather, I am doubtful that a move lower is still left to be played out on the day; however, if I am wrong look for a break of 1061 in the futures to signal a push back to the lows. If the E-Minis break 1053.00, then all bets are off. For now, I am going back to bed knowing confidently that the market should be on firm ground for the rest of the day.
___________________________________________________
Where we were then:
S&P Futures
Open: 1066.50
High: 1072.50
Low: 1056.25
Close: 1063.25
Where we are now:
S&P Futures
Last: 1318.00
DTW Lunchtime Recap
Going into lunch we traded 14 names with success having a positive p&l at lunch. We are holding on to 4,000 YUM, 1,00 YHOO, 200 DELL, and short 100 DOV. Going back to my previous post propering planning once again equals successful trading.
Thursday Market Expectations - Reasons why the market doesn’t go down, for now.
Is this the beginning of the small correction I have been looking for? Probably, but given the fight the bulls put up yesterday, they are not going to back off quietly. One might argue, buy the dips but sell the rallies more aggressively. I do not have the patience for that. I have too many other things to focus on. Either I am right and we will test 1300 in the coming days or I am wrong and we are in a fever driven hyper bull cycle that refuses to be broken.
But why? What are the positive catalysts? An improving economy. Yes things are slowly getting better. Perhaps you believe that there is still a great deal of cash to be put to work. I am not sure I agree with that one. Last I heard hedge funds were at near pre financial crisis levels of leverage and no matter how hard I try I cannot seem to get my credit card bills paid down, it is something that my wife and I are forever battling over. So near term, the catalyst for moving up is simply greed. “It worked yesterday, so I will try again today” seems to be the motto for the bulls.
As I write this it is 7:45am on Thursday and while futures indicate a negative opening on the heals of CSCO’s earnings (CSCO is trading down 10%) AKAM’s earnings (AKAM is trading down11%) TQNT’s earnings (TQNT is trading down 14%), I am amazed that the futures are not down more significantly. We await a weekly jobless claim number that should not move the needle. So here is my thesis, people have very short memories. I for one do not remember what I had for dinner when I came home last night, though I do remember polishing off a bottle of cabernet at the wine bar with a buddy, before I headed home for dinner. For some reason I think it was lasagna, but I really don’t remember. We as a species have short memories. Our memories are even shorter when it comes to recalling pain. Pain is the memory we most often repress, very logical. The traders, investors and financial spectators of the stock market, the greatest arena since the Roman Coliseum have repressed their fear, they trade with abandon as they rip the futures up 5 handles in the last 5 seconds of a day. They ignore the fact that we have not even tested the breakout “psychological levels” as support.
But I believe the time is upon us. The catalysts are not to be ignored. As I said earlier this correction will be a battle between two strong opposing forces. Leverage vs. Common sense. Fear vs. Greed. And finally a battle between the lessons of history vs. a brave new world where there is a new playbook, and perhaps my copy got lost in the mail.
Negative catalysts continue to be those I mentioned in yesterday’s Market Expectation blog. But let me add a few more. Unexpected developments in Ireland and Portugal. Forex spread gouging by major institutions. Bernanke under further attack over QE2. Our municipal bond infrastructure in jeopardy as the ratings agencies were once again, late to the game. I believe yesterday was the first right-handed body blow to the feverish bulls. Today will be a follow up cross to the left side of the jaw, the type where you hear a slight crunch, and tomorrow will be a right hook that will for the first time in months put raging bull to the mat, even if it is short-lived, at least he will remember that lost feeling of pain and markets will have an opportunity to normalize.
By the way my Aunt Beverly called me again last night, she wanted to know if i thought NFLX was cheap, needless to say i will be shorting NFLX.
Wednesday Market Expectations - 10 reasons the maket is at a near term top.
I cannot believe I have turned so bearish, but as I continue to watch the over-the-top activity of the last week, I am left with limited alternative. I cannot say this enough, I am looking for a solid 18% S&P performance for the year. I can even buy into a 20+% performance under the right circumstances. But as I always say, “Do the math”. We cannot sustain this pace. It is illogical. We would be tracking for an up 55% year. If you believe that, I have some land along alligator alley for sale. Yesterday was the most blatant example of “Air trading” or trading on greed and fear. There is nothing wrong with a day or two of greed and fear, but weeks worth of it do significant damage to the sustainability of market levels. Fundamentals and technicals are seemingly ignored in this kind of market. I was taught along time ago to sniff out the exogenous risks that tend to reveal themselves at market tops. They are as follows;
- Egypt – I would love to see Mubarak go quietly, but he won’t. Have you not been reading the ongoing abuse of basic human rights? Have you not seen the crowds growing? When they do prevail, what do you think they will do to a regime that has stolen nearly 100billion dollars from its people? 70billion of it going directly into Mubaraks pocket. He makes Madoff seem like a piker. Madoff got life. Mubarak will retire to a villa in Saudi Arabia. Do you not see the insanity of this?
- Middle east downgrades by the ratings agencies. As continued pressure mounts to reform multiple governments, and protests spread, the transition process will not go smoothly. There is too much at stake for the wealthy demagogues. They will not go quietly.
- Terrorism – the confusion of the moment will provide platforms for terrorist organizations to legitimize themselves.
- Iran – Their subdued activity should not be taken lightly. They are waiting the moment to interfere, perhaps even provoke Israel and America with renewed nuclear debates.
- North and South Korean talks ended as quickly as they began.
- China raising rates – Inflation fears are no longer fears, they are realities. Grain prices are soaring, Oil is creeping up to 100, and silver has become the new gold.
- Insider Trading – It won’t go away from Raj to Steve. Investors are losing confidence in their hedge fund oligarchs, perhaps they should be. The oligarchs have grown fat with wealth and irresponsible with management.
- Obama – Somebody tell me what he stands for, who he represents, what his agenda is. He is killing our global credibility. I have referred to this as M.A.S.S. – the Minimizing of America’s Super power Status.
- The Republicans – refer to my Obama comments.
- 10. The bottom line is that we are in an improving economy, but we are not creating jobs at a rate that will sustain the recovery long term, Over 1/3 of home owners are probably underwater (more debt then equity) Consumers may be spending, but they are going back to the old habits of racking up debt. Why not? We have been trained to believe over the last couple of years that if your debt gets too high, you can just walk away from it. Government spending is out of control. And finally I know we are at a top, because my Aunt Beverly wants to know if I think she should buy IBM.
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