YOU GOTTA KNOW WHEN TO FOLD ‘EM….
I still maintain that the rest of earnings season will be broadly positive, however, two negative trends have developed over the course of the last few days that have changed my market outlook from bullish to neutral.
The first change in trend has been the recent spat of “selling the news”. After the 6% run-up since the beginning of earnings season we are now seeing investors sell into strength. This is a clear sign that the buying power is waning. In essence, the owners of equities now have more incentive to sell than new buyers have to buy mainly because earnings were largely priced in over the course of the last few weeks. A new positive catalyst will need to develop from here for stocks to make a substantial move higher.
The second negative trend is the move in the dollar. Today’s nearly 1% decline in the dollar index is staggering. The negative trajectory of this move is simply unsustainable. I also believe the $1.50 mark in the Euro is one that will not be tolerated for long. Compounded by the move in the dollar is the surge in oil prices. It’s only a matter of time before analysts become increasingly concerned about the impact of high oil prices on consumers. Any move higher in the dollar (for whatever reason – short covering, politics, etc) will weigh on the market.
For these reasons I think it is prudent to take a step back from the poker table and take a break. Although I am not shifting to a short position I do view this market as one that is characterized by abnormally high risks. The strength could very well continue through the next 3 weeks of earnings season, but after the 6% surge over the last 4 weeks I think it is prudent to take profits here.
Sometimes when you’re sitting on a strong hand you need to realize that the risks outweigh the rewards and that perhaps your hand isn’t quite as strong as you think….
Lucky timing on this one….
TPC, I think risk reward ratio has already shifted on the short side: I agree sentiment has changed in the last few sessions, also, we have strong divergences on different timeframes. Selloff could start any time (may be it already did) on perception “liquidity” rally can’t go on forever and further dollar weakness could be an accelerator…
The dollar is what did it for me. That 1% move down had all the feeling of throwing in the towel. Any relief rally in the dollar will crush this market.
Lucky indeed. but that is part of the game no? It looks like a very prudent decision nonetheless and there is no luck in that. Your decisions always appear based on sound facts. Thanks for keeping us up to date.
Better to be lucky than good, right? Sometimes you need to be a bit of both. I am just trying to be prudent that’s all.
Thanks for the kind words.
Are you ever going to short or are you just going to sit on the side lines.
There is simply no way I could feel comfortable getting short knowing that earnings will be better than expected over the coming weeks. If earnings season were ending now I would perhaps take some short positions, but that is not the case.
In full disclosure I am short Yen and C$.
If -as it seems- mkt has stopped to rally on better than expected results I’m starting to build 1/3 shorts in this area. I also think now risk reward is decent for a long trade on 10 and 30Y govt bond, both US and German
TPC, if you and when had to get short, which sectors (ETFs) or companies would you be shorting?
Thanks as always!
Not TPC, but I am targeting short banks. they lost leadership when BAC and GS disappointed. Techs have been high fliers but they’ve delivered the bacon with GOOG and APPL blow-out earnings. They still have leadership if money mgrs buy the dips and this is another bear trap set up. Also, if you believe the FED will have raise rates to defend the dollar, I would put a small short oil at these levels.
Thought provoking question. I really don’t want to be short into the rest of earnings, but if I were to short something I would probably lean towards consumer names and the retailers. The recovery in the consumer is muted at best, but for some reason the retail index has made a v-shaped recovery. That just doesn’t add up.
sell on the news is in place…if market can’t go up about half away…chances are you’ll see major dumping toward the end
TPC,
If there’s two things readers can take away from your approach, it should be patience and risk-management. A very nice call getting out today, chasing the last 2% is never ever worth it..To paraphrase Jesse Livermore, more money has been lost chasing the first and last eighths of a major move than anywhere else.
I don’t want to put words in TPC’s mouth, but it looks like his approach takes an extraordinary amount of effort, time, diligence and patience. I don’t know if it’s appropriate for most investors.
You’re not putting words in my mouth at all. I’ve literally spent lifetimes putting my strategies together and perfecting them. Even after this, my work is highly flawed. To say that it is not appropriate for your average investor is exactly right.
The main takeaways, as VCC said, are applicable to all investors, however. Patience and risk management can’t be stressed enough.
Watch, the market will rally 1,000 points now….
A lot of people are sensing this market is weak, which could mean this is setting up for another mini rally on short blood. TPC, I am with you that shorting during earnings, gdp announcements, and continued liquidity injections doesn’t seem like the best choice. Talk to me in the middle of november though and I’ll probably be short…
TPC, I agree with you but think you may want to rethink not going short. The dollar slide and oil prices are a game changer. The FED is in an intractable pickle of their own making. If they stand by idly and let the dollar keep sliding, oil prices will spike and crush the consumer and this fragile green shoots recovery, which is probably a media illusion to begin with. On the other hand, if the dollar slide forces their hand and the FED has to raise rates now (a full year ahead of what the markets expect), it will absolutley crush this speculative, technical driven risk trade that has been driving equities straight up for months. A sudden, surprise rate increase will have severe spill over effects on equities as massive amounts of dollar-based carry trades will unwind all at once. The FED cannot jaw bone the dollar in stability anymore. The markets are forcing their hand.
I don’t disagree. I just don’t feel comfortable being short when my fundamental analysis says that earnings are going to be strong over the coming 3 weeks.
What would it take for you to get short?
A much better set-up than this. Shorting is so much more difficult than being long. I would have to see near parabolic moves and eye popping optimism. I am not a great short seller so I am not the authority on this topic.
TPC said:
“I don’t disagree. I just don’t feel comfortable being short when my fundamental analysis says that earnings are going to be strong over the coming 3 weeks.”
I don’t see your “Fundamentals” being strong
If ETN was an example–I don’t buy your take on it.
Plus (20-25) times earnings–in a weak economy??
I will agree some earnings are better than last quarter
But on a yr/yr basis the comparisons are tragic
Some would argue that the last few (3) quarters are abnormal–ok
But you would have to be a “true believer” in the macro future to argue that point
I need more than BS “Green Shoots” “Cash for Clunkers” “Homes for the Hopeless” programs to convince me that the US Economy is in recovery.
Of course I can always rely on the Wall Street analyst for an “honest” evaluation of earnings–that would be the “don’t count the losses and one time charges” program.
It looks like somebody might be taking a second look at the banks earnings/loan losses–whisper-whisper
It’s all based on comparisons. Of course the earnings and organic growth are still meager. Revenues are not strong at all, but the analysts and the investment community still expect earnings to come in well below where they are actually coming in. It’s an expectations game and I don’t see how one can feel comfortable getting short when 75% of all firms reporting are beating the expectations….
I don’t mean to imply that the underlying fundamentals are superb. Expectations are simply far too pessimistic.
I think we’re seeing a change in investor focus and expectations. My guess is that we’ve seen most or all of the bounce from the current earnings season and that investor focus will change from earnings to economic news. With a positive GDP on 10/29, I’m guessing expectations have largely changed from “less bad” to “better” – i.e., investors will be looking for confirmation that the rebound in the economy is continuing, which to me implies improving retail sales, housing starts and new home sales and sustained or perhaps improving positve new sales in the manufacturing ISM. I’m guessing that’s where the risk lies now – i.e., a lack of “better” in the indicators. I also agree that a lot of the upside is already priced in, so the greater risk is probably to the downside.