THREE THINGS I THINK I THINK
17 March 2010 by Cullen Roche
32 Comments
- The complacency in the market is now reaching a fever pitch. It always amazes me that investors can be so bearish near the bottom and then be so incredibly bullish after the market has risen so substantially. On January 28th I said the market was not forming a major market top and that the downside was “more likely a correction within the uptrend”. At S&P 1,140 I went net short for just the second time in the last 12 months. With our H1 outlook largely playing out as expected I now find myself wondering if we are in a euphoric blow-off top and on the wrong side of the trade….
- Mad Money started 5 years ago on CNBC. I vividly remember seeing the show when it started because it began right around the same time when the great Louis Rukeyser got sick. My first thought was: “there is something seriously wrong with the market if its participants are willing to listen to a man banging on buttons and acting like a lunatic.” The power of Cramer over the years is undiminished and leaves me wondering exactly the same thing today. Cramer is a good investor and a GREAT salesman, but you just have to wonder after 5 years – the market is flat over the same period – have any of his viewers actually come out on top after taxes and fees? My guess is very few….Investing is not a joke. It is not entertainment. I am not sure why anyone thinks it is okay to make it seem that way.
- While I continue to think the VIX is a sign of near-term complacency you just can’t help but wonder if investors are still too fearful in the long-term. The majority of investors still don’t have an ounce of faith in the recovery and this is reflected in the historically high VIX. In the past two recessions, the VIX did not reach its historical low of 10 until at least 3 years into the recovery. Perhaps most important, the market rallied this entire time.
TPC, I’m sharing exactly the same thoughts: I’m net short (lng Bund, lng Eur-Usd, sht European Indexes). Although I recently increased my shorts on index futures, for money management purposes I must consider reducing the short Index position if some price reversal action don’t show up before the end of this week.
The Fed and other government agencies can maybe manipulate the market longer that you can stay solvent but they cannot do it forever…
since you are up more than i am since i started reading here, i am going to start listening more.
tpc
you are now short?
Been building a net short position in equities for a little over a week now….Not huge, but enough to ding me.
I remember back in 1979 when I first got involved in the stock market. My co-workers (almost all of them) used to look at me like I was some kind of riverboat gambler. These people had long memories and they remembered the devastating 73-74 bear market. Just like the recent bear market, many investors in those days got slaughtered. Many lost almost everything. It took years before these people came back in the market again. I bring this up because those who are looking for the mutual fund/passive investor to come back may have a very long wait.
I also noticed that the VIX is at about the same level as it was in March of 2000.
This is the market that never goes down! I’d like to meet the lemmings who buy after a market rallies every day for a month.
This has shades of a 1999 feeling to it. Irrational, yes.
The banks are walking us up to 1200 and apparently they need to do it before Q1 ends because their earnings from every other sector suck.
The market is what it is – it is not irrational – it could go much higher – the US market has gone nowhere in 10 years – the Nasdaq remains 50% below it’s level of 10 years ago – the economy apparently sucks but there are billions (trillions?) of dollars in the system gaming the market – maybe the economy is better than a lot of people think – I have no clue but keep in mind the market topped out in 2007 when it seemed the economy was doing fine – considering the economy in terms of the market is like driving while looking in the rear view mirror – vix at 16 is low only on a recent historical basis which saw fear levels elevated to new extremes – the long term average of vix is between 10-20 – we are roughly in the middle of that now – I do not buy the manipulation of the markets – if the powers that be were so adept at manipulating the markets, where were they in 2008 when the markets were falling off a cliff – no it’s money and liquidity – liquidity ceased to exist in 2008 and the rush to liquidity resulted in the sale of anything that could be converted to cash – now we have the same situation in reverse – liquidity flowing like crap through a goose – it’s inflation but not necessarily in the cost of goods and services but rather in the cost of the market – until that money source dries up or migrates to something else, the markets will remain well bid and could go much higher
Just curious – what were you looking at or following in 2007 that made you think everything was fine?
I genuinely want to know because it was in the spring of 07 that I started to become convinced, more and more that the crap was about to hit the fan. I expected US and Canadian stock indexes to fall a good 30-50% and it happened, just a little under a year later than I thought it would, thanks in part to some pretty extraordinary measures that were being taken even then.
I saw that the housing market had topped out and was starting to fall in what seemed to me some pretty over-leveraged, speculative markets, that credit (specifically commercial paper) was freezing up, that rising oil prices were driving up costs for consumers and business, that there was growing wealth disparity and ‘private’ equity buyouts were skyrocketing (remembering the LBO frenzy from the 80s that preceded that crash).
So really, I’m curious as to what indicators someone follows who was bullish while I was fully expecting the sort of financial armageddon that occured a year later than I anticipated? Obviously, it was different things than I – unemployment was admittedly low then – was that it??
I’m sure you’ve all read this, but in times like these, when smart people try to think the unthinkable through as much as possible, I love going back to Reminiscences of a Stock Operator – really, is there any set of advice out there that is more valuable, yet more simplistic at the same time? Alas…
“Conditions are your best ally.”
“Obviously the thing to do was to be bullish in a bull market and bearish in a bear market.”
“I came to learn that even when one is properly bearish at the very beginning of a bear market it is not well to begin selling in bulk until there is no danger of the engine back-firing.”
Additionally, in my own experiences I’ve learned that 1) if there is no reason for the market to go down, it will go up and 2) the market is a foward-looking discounting mechanism only when it comes to bullish hope; it is a lagging indicator, that must be smashed in the face with a brick of soberingly disappointing reality, when it comes to bad news, which explains why housing began falling apart in 2006 and yet the market continued to rally for over another year…
As it stands, conditions are bullish, there’s a lot of hope out there that things are getting better, data points (even if they are merely improvements off easy Y/Y comps)are improving and lastly, there is no reason to sell!
I think the last quote is the key; there’s a major difference between being (very) bearish (or bullish) and having a (very) net Short (or Long) position on.
While I’m bearish, and some of the data is looking decidedly mixed; there isn’t much value in being aggressively directionally short currently…
And while it’s frustratingly dull waiting for the time to come, it does at least let me spend my time researching the stuff I’d love to buy somewhere lower.
“It always amazes me that investors can be so bearish near the bottom and then be so incredibly bullish after the market has risen so substantially.”
This is directly a result of the market being a purely momo scheme and Fed put + ZIRP.
On the way up … chase momentum … you can always hedge quickly if needed.
Of course, this fails when everyone is chasing liquidity, so stocks plunge, and despair reigns.
Then, everyone waits for the Fed to bail them in and go momo go.
Moral hazard is no theory, it has been in effect (at least in modern market times) since the latin american debt crisis … that was one of the more recent starts to TBTF.
TPC, been waiting for the VIX post for almost two days now! Whew, I was starting to think I was the only one.
Inflation, inflation, inflation. USD flat today but forward looking models expect big time inflation, and rightly so. Look how we spend spend spend. Of course, some would say crushing the dollar is purposeful for two reasons:
1. Buy buy Middle East PetroDollars (good)
2. The Amero – Canada, US, Mexico (bad)
Q: What soul-less group of people could want this to happen?
A: Bilderberg….
Ugh, I feel filthy with all this conspiracy theory but how can anyone turn a blind eye anymore???
Er, meant BYE BYE middle east dollars – Freudian slip I guess…
Just a personal observation…
Here we are in a market willing to generally accept SPX EPS of 75$ for 2010. On that measure we are fairly valued and there is little argumnet. Its next year’s EPS where the real battle will be fought.
Next year, 2011, 95$ is pencilled in by Wall Street, and if that materialises we will be close to 1500 very soon…
now that 95$ figure, at first blush, is very hard to swallow, considering it is basically 2007 market peak levels and so much has changed since then…
Unemployment sky-rocketing, Financial sector having been diluted to bits [meaning even if it earns as much as it did in 2007 it will have a severly diluted contribution to the 95$], consumer de-leveraging, almost no credit growth etc etc
Then…I sit back and notice that overall credit is still growing, its just that its growing at the Government debt level, not the consumer level, but the absolute level is still rising. This is not good news long term, but it picks up the slack for now.
Most importantly though is that the composition of SPX EPS has changed materially since 2007. Its not the Citibanks that drive this market anymore. Its the Apples, the Amazons etc etc. Apple is earning 4 times what it was in 2007, ditto for Amazon. These are not small companies…they matter more than the Citi’s or JP’s of this world.
Even a Wal-Mart is expected to earn 40% more than it did in 2007 next year and a boring (!) stock like Microsoft 35% more.
I am a firm believer that eventually we will hit a brick wall as we will run out of bullets soon once the Sovereign debt issue is tackled and the inevitable dampening effect of higher taxes etc etc. Inflation from China etc
Until then though, the SPX has changed since the 2007 top and the companies driving it higher have some considerable earnings momentum. Its too early to fight that trend at the moment in my opinion
Well, I just covered my shorts and am now long. Nothing is stopping this market from moving higher. Every 1 point decline in the S&P is bought.
New high!
Can you say short squeeze? Shorts throwing in the towel as we speak….
“It always amazes me that investors can be so bearish near the bottom and then be so incredibly bullish after the market has risen so substantially.”
I have seen many authors in the past 3 months equate a rising market for some high level of bullishness. I just don’t see it. Yes, there are some bullish talking heads out there but, overwhelmingly, market participants seem to be neutral to bearish right now. I think it is misleading to tell people that investors are “incredibly bullish”. Its not the case. There just isn’t any other investments out there so the stock market is the default location to put cash.
And Cramer… listen, the guy throws 10-15 picks a day out there. In a year he will basically cover most of the market. He isn’t so much recommending stocks as teaching people what to look at and walking his viewers through his thought processes. I am no Cramer fan, but I don’t think he deserves the contempt he gets from the blogosphere. How about you give us 15 picks a day so that we can evaluate you in a year?
Wait til I post the sentiment figures for you tomorrow. Then you can tell me people aren’t wildly bullish. I am expecting record reading across the board. Yeah, people might not be super bullish in the long-term, but in the near-term the sentiment data is off the charts bullish. Off the charts.
As for Cramer….You said it. He basically picks the entire market over the course of the year. I would never be silly enough to go on TV and make 15 picks every night because I know that is a recipe for guaranteed market underperformance. If you are the market, how can you outperform it after taxes and fees? You can’t. If you’re a regular reader you know that I only make about 1 or 2 conviction calls per month – if that. Cramer could save his viwers a mountain of time by saying: just go buy SPY, reinvest the dividends and save yourself on taxes, fees and an hour per night being duped into thinking that my stock picks are better than Bill Miller’s.
I know Cramer has good intentions, but let’s be real. Who is he really helping? his network’s bottom line or his viewer’s bottom line?
Have to agree with TPC here. You don’t break highs with momentum unless there’s a lot of bulls on parade. Additionally, I can’t remember the trader (from one of the Market Wizards books), but I remember that he made a very astute observation when it came to trading. I’m paraphrasing here but basically what he said was: you shouldn’t be betting on whether or not a high/low (resistance/support) will be broken because it’s very hard to tell until you get there; However, the smart trader is betting that it WILL get there and is out with a profit once it does. I trade like this very much and it’s really really good advice.
Given that, that big round 11,000 on DJIA and 1200 on S&P is almost certainly going to be tested. I would stay long until then, then get out and watch what happens next. Its less exciting, but that’s the kind of trading that makes consistent money – the kind that isn’t really “gambling”. Of course, that’s just my humble opinion….
Oh and Cramer is a joke – an entertainer. If he was actually good at trading, he’d be doing only that and not telling the world and pressing a sound board. It’s comical and silly – hence its mass appeal. Not to mention Goldman would’ve done more to keep him if he was any good.
Again, TPC is absolutely right here: what fool makes a call on ANY stock that gets mentioned and then screams “BOO-YAH!”?? Even if that was smart (and its not), who the hell cares if its up or down – you can’t trade off of that! You need to know price points. Not to mention, I think he over analyzes crap stocks that he’s already holding. He’d be doing a much better service if he was teaching fundamentals of trading like CANSLIM, limit orders, stops, option hedging, etc. Then perhaps he could go back to basics and give advice on the markets/products where real action is: Commodities, FX, Futures, Options, etc. Instead he explicitly avoids these topics whenever asked.
I will say this though: back when I was prop trading in 2005 we all used to sit quietly during his “At the Close” session. Anything this dingus mentioned would gap 5-10% in seconds (then of course sell off). It was basically a daily lotto play and anyone who was holding what he called would scream BINGO. Silliness…
I’ve run the numbers on Cramer. He ran a suped up Nasdaq 100 fund in essence and compounded at 26% during the greatest bull market ever. The Nasdaq 100 actually performed in-line with this over the same period. So, after taxes and fees I am willing to bet that Cramer was no good at managing money. Of course, he won’t release his audited returns so that someone like myself could actually perform some forensic accounting on his fund. I would be willing to bet his risk adjusted returns were poor and mostly attributable to a high beta.
LMAO, sounds about right.
Like I said, if he was any good at it, there’d be no reason to stop doing it. I don’t buy for a second that he was “over stressed” – if that was the case he’d cut back size or volume. Not to mention, why would he then start a “charitable trust” and like 3 websites…..and jump up and down on tv everyday like a clown.
A good trader is only good because he loves what he does.
TPC,
You’ve got brass balls to be short into this onslaught. I can’t remember stocks going up like this since dotcom. I’d prefer to do it thru currencies, but you probably know that.
Those brass balls are getting punched right now. I almost always have currency plays on. Like your Yen call here.
Patience grasshopper. Change is in the air.
TPC
whats your view on fri(triple witch option exp) Volatility should pick up significantly. I am very short and sweating!
How far can she go…
“The funds released by the Fed became available to invest in the stock market and “from that date, according to all the evidence, the situation got completely out of control.”[8] Galbraith disagreed with this simplistic analysis by arguing that the availability of money in the past was no sure recipe for a bubble in common stocks and that prices could still be regarded as a true valuation of the stock at the end of 1927. It is early in 1928 that the “escape into make believe” started in earnest, when the market began to rise by large vaulting leaps rather than steady increments. Prominent investors were described by Professor Dice as “having vision for the future and boundless hope and optimism” and not “hampered by the heavy armour of tradition”.”
http://en.wikipedia.org/wiki/The_Great_Crash,_1929
“if the powers that be were so adept at manipulating the markets, where were they in 2008 when the markets were falling off a cliff ”
The PPT exists as all you have to do is read the legislation that created it. Since it is a government agency/invention, they monitor the markets and they are funded with a certain amount of money. How they predict how much money they need is anyone’s guess but since the size of the sell off in ’08 probably caught them, off guard and until Nov of that year didn’t have the money to control it. That’s the answer…they didn’t have enough reserves to stem the historic selling. Notice on the chart that we started finding a bottom after TARP. TARP gave the PPT and gvmnt what they needed to support the markets and they’ve been putting a floor under the market buying SP contracts an forcing money managers to long the market since.