Let's see, the stock market rallied while economic data was weakening. Yet bonds were rallying at the same time, and yields have been plunging -- to near record-lows of 2.75% in the 10-year! This was a great dichotomy that had many people scratching their heads. Why would stocks rally and bond yields plunge while we got weakening economic data?
Well, if they were fueling up the helicopters, that would make sense.
Remember the bond market is often "smarter" than the stock market. The plunge in yields has been telling you something. Is it not interesting that the stock market and bond rally continued until the Fed announcement and then failed on yesterday's news? Sell the news, baby.
Still wondering why the market has such bizarre action? Why the Mom-and-Pop investor wants little to do with it? Wondering if fear of Flash Crash II runs high? Look no further, High Frequency Trading (HFT) has been indicted in full.
I won't reprise the entire analysis -- you can wade through the orginal posting on Nanex discoveries yourself, and it's worth a look if only to see the fascinating and bizarre charts. But I can summarize it: The markets have run amok with diabolical "quote stuffing" programs that try to mine holes in the market system and fool other computers and markets into coughing up stock quotes at absurd prices.
Trying to trade or game this market? Be careful, you can get your head ripped off. That being said, I believe the downtrend has now resumed and that the market is currently a downtrending market.
I expect we'll revisit sub-1,000 on the S&P again -- more likely even sub-900 -- before the federales start fueling up the helicopters for another money drop. I'd buy the market on a 200-point S&P drop Reasons why I remain negative on the market:
I read somewhere recently that watching the market these days is like watching a squirrel trying to cross the street. It zigs, it zags, you're not sure if it will make it to the forest or get flattened by a bus. Couldn't think of a better metaphor.
How else to explain a market that gives up 8% one month and gains it all back another, only to sell off when consumer confidence numbers are announced? And by the way, how do you explain the fact that the market is at highs while consumer confidence is at a five-month low? The answer: We are all squirrels, zigging and zagging randomly across a economically screwed up landscape, trying to find our way.
If there's any good news to be had, it's that the cost of debt is approaching an all-time low. Greeaaaattttt!!! Go borrow some money (if anybody will lend it to you). Yes, today, the 30-year mortgage yield hit all-time lows. Can you figure it out? I can't.
One thing becoming clear in as the volatile stock market marches into they unknown world of bank stress tests, serious government intervention, and bank roulette -- technology is set apart from the rest of the field.
Many mid-to-large technology companies are well capitalized, cash-rich, and profitable. This means they can simply power through the economic doldrums, generate a large cash stash to reinvest through either acquisitions or R&D.
Below is a list of cash-rich technology companies. What will they do with all this money? My guess is that eventually, acquisitions will be on the docket.
Just for chuckles, I screened for stocks with more than $1B in cash. Below is what I got:
The other day I ranted on the many opinions of the economists. Everybody has an opinion. What's my opinion on the market? The S&P chart stinks.
The market action fits almost exactly the technical picture I expected: A rally to 1100 on the S&P might run out of steam and reverse. This is exactly what happened to the last rally, nearly a month ago, for those of you who forgot: We had a rather violent bounce of 100 S&P points that failed.
Today, like clockwork, the rally is starting to weaken. Don't listen to the pundits on TV telling you earnings matter. They don't. The market is marching to the beat of a different drummer.
We remain in a violently chopping, downtrending market that is switching direction roughly once per month. If you are an investor, stay away. If you are a trader, make sure you can switch teams quickly, as it appears to me the S&P may be starting another rollover. We topped out almost exactly at the top of the channel carved out by recent descending highs and lows. See the chart below to see what I mean:
Keep in mind, if you have been trying to jump on rallies or jump on bear raids, there's a high risk of a violent reversal. A post on Zero Hedge encapsulates this very well. The data below shows you that a 6% rally is just as likely to be followed by a 6% selloff, and vice versa.
What's really uncomfortable about this is how perfectly the market has alternated between aggressively rallies and vicious sell-offs -- a month up has been followed by a month down (often bigger) each time. I think if you are trying to pick stocks in this market you certainly need to do it carefully. If we were all geniuses, we would buy cheap stocks at the end of the selloffs and then put some hedges in after these 6% rallies. Or you could just sit on a lot of cash and watch the hedge-fund computers chew each other up, which is what appears to be happening to me.
What's my course of action? I have just re-initiated a small S&P short and bought a few index puts to hedge my smallish stock positions. Do I feel confident at all that this will work out? Not really. But my read on the chart is that we are rolling over again.
Funny how fortunes swing. Just a few weeks ago, BP was racing quickly to the bottom as Apple was contemplating world domination. This week, their fortunes have reversed -- if only a bit -- as Apple confronts antenna engineering problems and BP's shares are on the rebound on the promise of an oil cap and/or takeover.
Apple shares were down 3.73(1.45%) to $249 and BP shares rose .84 (2.3%) to $37.02 in midday trading. Apple will be holding a press conference on Friday, as its antenna problems on the iPhone 4 appear to be expanding.
The Pentagon is running out of funds (Reuters). Soon to be downgraded to a Triangle.
Manufacturing data bad = stocks down (Bloomberg). One question I've always had: If the stock market is "forward looking" and "discounting," why can it react so violently to news?
Billionaire Carlos Slim is digging for gold in Mexico (Bloomberg). Funny how even Billionaires want to find more money, isn't it? I mean, I'd hit the beach after the first $2B.
Just because an economy is crummy, or just sub-par, does not mean you cannot make money. Plenty of companies have proven that innovation can create value even in a down economy.
This was a fascinating topic to me in the earlier part of the last recession as I watched Google and Whole Foods Markets climb steadily during the recession of 2000-2002. If you think about it, these were very strong companies that created lots of value, jobs, and profits during a period in which the economy was stagnant or shrinking.
What about now? Regardless of the worst economy in 80 years, there are still opportunities.
To give you some examples, where are some more ways companies create value in a down economy:
Providing a technology that performs a task more efficiently, better, and cheaper. This is a basic goal of technology innovation: Give your customer 5X the power at the same price, then they buy a product. Some examples I see of companies doing this include Riverbed (RVBD), in enterprise networking, CREE in LED lighting, and Western Digital (WDC) in digital storage. All three of these companies have grown during the "Great Recession."
Scientific discovery in healthcare. A scientific discovery can create value no matter what the macro economy is doing. Many biotech companies are still booming and creating value, regardless of what the economy does. This is because they can make discoveries that create new markets out of thin air. Some quick examples: Qiagen (QGEN) develops new test for human papillomavirus -- its stock us up 50% in five years. Illumina (ILMN) has outstepped the competition in sequencing genes. In five years, its stock is up 500%, compared with the S&P being down in the single digits.
Providing a high quality product and brand. Markets are constantly choked by competition, but if you can consistently provide high-quality product that gets consumers excited, you will take market share and grow your brand. Some great examples of this are Apple (AAPL), Green Mountain Coffee Roasters (GMCR), True Religion Apparel (TRLG), and the Intercontinental Exchange (ICE). All of these companies have grown in the last five years. In fact, Green Mountain tripled revenue in the years 2007-2009, and ICE doubled reveune from 2007-2009.
As you scan the landscape of pundits and economists these days, it seems as if there are only two options: Implode in a fiery economic inferno or come roaring back like economies of yore.
I've found that if you hear too much chatter about one thing, it's more likely that the opposite will happen. How many times has the economy threaded the needle of non-expectancy, just as Nassim Taleb outlined in his now-famous book, The Black Swan.
This morning I woke up and flipped on the computer and my market-monitoring screens to find a sea of green. Everything up: stocks, commodities, gold & silver. Then what happened? My music player, in shuffle mode, queued up the Who's "Don't Get Fooled Again."
Funny. Coincidence? I don't think so. Roger Daltry is onto something. It would be easy to get lulled into a newfound sense of complacency if you didn't consider that just a month ago, the S&P rallied from a bottom of 1,050 to 1,116. That was a huge fakeout.
This last rally has now taken us from a low of 1022 back to the current 1,094. Powerful, no doubt. But it's also giving me a funny sense of deja vu. Note that the last rally, in June, was about 66 points in the S&P. The current rally has retraced 82 points of the recent decline, but it's still below June's high. If it's going to fail, it should fail this week. If not, the bulls have a solid argument to get bullish again.
Are the bulls really confident? So far in the last two months or so, the 50-day moving average has turned down, it's cross the 200-day moving average, and we've traced out a lower low and a lower high on a subsequent high. Would that make you comfortably long stocks? Not for me.
