*Short term deep oversold becoming extreme (bottom segment of first chart).
*Momentum and MACD well above previous lows (second and third segments of first chart).
*Significant bullish non confirmation from selected global markets (including Europe 350) versus US (second chart).
Want to see S&P 500 break 1042 intra day low AND/OR new closing low below 1050. That would produce the new low and set up the conditions for a non confirmation.
Do not want to see 10 to 1 advance/decline to the downside today.
If above occurs, selective purchases are advisable.
Single biggest risk to above is the impending Mega Trend reversal (top segment of first chart). Possible but unlikely as it would also require other markets to confirm to the downside. For that to happen, an already deeply oversold market would have to get even more deeply oversold (as in at least another 50 points to the downside RIGHT NOW). As I said, possible but unlikely.
Note: This is a short term forecast. It does not alter the longer term view that stocks are in a distributional topping process. In fact, the current decline only makes such a view a greater probability. The world may appear to be going to hell in a hand basket, but not quite yet.
Tuesday, June 29, 2010
*Short term deep oversold becoming extreme (bottom segment of first chart).
Friday, June 25, 2010
Is the bubble about to burst?
"China Vanke - the country’s biggest property developer is slashing prices for its new properties by 20 per cent, according to reports in China Business News and the Shanghai Morning Post."
FT.com/beyondBRICs, June 25, 2010
Posted by Vinny Catalano, CFA at 12:56 PM
Tuesday, June 22, 2010
Magicians do it. So do con artists.
In the coming weeks, the focus for most bottom-up oriented investors will be the earnings results. The trend chasing hedge funds will play that momentum game, too.
As I have articulated repeatedly, 2Q10 earnings results are set to come in at to slightly above consensus expectations. Few surprises should emerge. For bottom-up oriented investors and the hedgies, this is where the attention and action will be focused. Stocks will respond accordingly as results and guidance are dissected.
While this quarterly process is underway, another very important process will occur – macro economic data for the third quarter. It is this data that will provide the early indications as to whether the US economy will sustain its recovery or begin the long (and very dangerous deflationary) slide to double dip land.
Sometimes it is lost on the bottom-up oriented crowd that earnings are the END POINT of the economic chain. To be sure, the feedback loop from the micro (corporate earnings) to the broader macro economic environment is an essential part of the economic chain (capex spending, wage increases, new hires). However, most indicators suggest that a positive feedback loop is muted due to concerns about the sustainability of the economic recovery – Alan Greenspan (misguided) speeches notwithstanding*.
Should 3Q10 macro economic data points come in below consensus expectations, the risks of something more than an economic slowdown (which is occurring right now) could develop producing a nightmare scenario that would produce a global economic recession and all its consequences.
What makes all this extra worrisome are the technical signals emanating from the markets.
Markets, countries, regions, sectors, and most industries have gone sideways - in some cases since the fall of last year. Such sideways action can only mean one of two things – consolidation or distribution.
Consolidation is the pause that refreshes the bull market. Distribution is the topping action that precedes a bear market. The resolution will signal the next phase of the market. Frankly, my money is on the new bear primarily for a whole host of fundamental reasons, some of which are noted above and throughout this blog.
Moreover, nearly all of Europe has flipped into bearish territory (Mega Trend reversals) while key emerging markets border on the edge of joining the bear club. Only the US stands in modestly good shape, but it, too, appears to be following in the footsteps of other global markets.
Investment Strategy Implications
Chill until, is the operative strategy. Let the earnings season and the new quarter evolve. It is still a bull market until it isn’t. Warnings signs may abound but until the yellow light turns red, it appears advisable not to jump the gun too soon. Yellow lights can stay yellow for quite awhile. Moreover, while it is rare, strength can evolve from those markets that have not turned bearish (US, for example) thereby helping to reversing those that have (e.g. Europe).
Also, it is advisable not to be too preoccupied with second quarter earnings results. And most definitely do not be lulled into a false sense of security by traditionally trained economists with their trend extrapolating methodologies and notoriously bad track record spotting economic turns. The misdirection of the recent earnings results and poor forecasting tools are substantial risks investors would be wise to avoid.
Finally, as noted last week , determine if you want to take the bold approach (100% invested in equities) or the more cautious (60 to 80% invested). For what it’s worth, Blue Marble managed accounts are in the latter category.
Thursday, June 17, 2010
“We are about to embark on a momentous experiment to discover which of the two stories about the economy is true. If, in fact, fiscal consolidation proves to be the royal road to recovery and fast growth then we might as well bury Keynes once and for all. If however, the financial markets and their political fuglemen turn out to be as “super-asinine” as Keynes thought they were, then the challenge that financial power poses to good government has to be squarely faced.”
Lord Robert Skidelsky, FT, “Once again we must ask: ‘Who governs?’”, June 15, 2010
The transitional nature of this stock market fits perfectly with the transitional nature of the global economy – are we headed for the virtuous circle of sustained economic growth or will the decision to withdraw fiscal stimulus advocated by the G20 members result in a double dip (or worse)? The early answers to this question will not be found in the present but in the near future – specifically the third quarter of this year.
Once we get the at-to-slightly-above-consensus 2Q10 earnings results out of the way, most of the focus will shift to the third quarter. Early into the third quarter, macro economic reports will provide an advance notice of what lies ahead for 3Q10 earnings. If the traditionally trained economists are correct, 3Q10 economic results should present no problem and come in at or above consensus expectations thereby ensuring that 3Q10 earnings results will meet the current optimistic projections.
If, however, third quarter macro economic data issued week after week produce below consensus results, then 3Q10 earnings results are nearly certain to come under expectations. Then the fun begins.
Stock Market Signals
All this would coincide with stock market action that will reflect a resolution of the sideways performance exhibited by virtually all indices since the fall of last year. This resolution will present itself in the all-important Mega Trend. If the Mega Trend* reasserts itself with price moving back above both key moving averages AND in the process reverses the recent bearish Mega Trend signals from Europe, then the trading range of the past 8 months has been a consolidation range, the bull market is back in gear, and the real economy will likely not suffer a double dip (or worse).
If, however, the Mega Trend in the US and Asia follows the lead of Europe and produces a bearish reversal signal, then it’s game over – the real economy outcome will likely be something far worse than a double dip.
Investment Strategy Implications
Going into the third quarter, investors who subscribe to the above have two choices: Bold or Cautious.
Bold would recommend a 100% exposure to equities. Cautious would suggest a 60 to 80% equity exposure. While both approaches stand at the ready to shift gears should a bearish outcome become evident, I believe there are two advantages to choosing the cautious stance.
First, any near term decline (i.e., a move to the lower end of the trading range, which is 1000 to 1050 in the S&P 500) would generate a negative return but positive alpha, while any near term advance (i.e., a move to the top end of the trading range, which is 1150 to 1220 in the S&P 500) would produce a positive return but negative alpha. A form of portfolio insurance, if you will. Secondly, and perhaps most importantly, a cautious approach keeps the mind focused on the worse case scenario and will help facilitate rapid action once the below consensus economic readings start filtering in and the bearish Mega Trend signals are generated.
Stocks do not trade in a range indefinitely. A resolution to the upside would say that the trading range was a consolidation, that the bull market will resume, that global markets that had been weak were temporary, that the economic handoff of government spending to private sector sustainable growth has been successful, that the virtuous circle has taken hold, and that earnings and other key inputs into the valuation process will be better tomorrow than they are today.
Alternatively, a resolution to the downside would declare that the trading range was a distributional top, that global markets that had been weak were a warning sign, that the economic handoff of government spending to private sector sustainable growth has not fully occurred, that the virtuous circle has not fully taken hold, and that earnings and other key inputs into the valuation process point toward a tomorrow that will be worse (I would argue far worse) than they are today.
Alfred E. Neuman Would Be Proud
If there is anything to be learned from the recent crises it is that incremental thinking to rapidly deteriorating situations produce catastrophic results. Here’s a partial list:
• It’s only a subprime mortgage problem
• The banking crisis is contained to the financial sector
• Greece is a very small part of the European economy
• It’s just an oil spill, a leak
With virtually no margin for error this time around (as in extremely limited government flexibility), any economic deceleration or decline could snowball rather quickly. The wrong thing at precisely the wrong time. Partying like it's 1937.
All That Jazz
The quote from Lord Skidelsky above says it well - we are about to embark on a grand experiment, we will improvise as we go along, we are confident in our experts, we have faith in our meritocracy, we are BP.
Will this work? We will find out soon enough.
*Use the search function at the top left of this page for prior blog postings on the Mega Trend.
Monday, June 14, 2010
Friday, June 11, 2010
With investors having nicely responded to the Tuesday blog posting ("Today May Be The Day"), here are a few price points of interest and what to consider when either is breached first:
1100 is the average of the 200 day moving average (simple and exponential). 1040 is the acknowledged lower bound of the support that some have referred to in the media. Both are lines in the investor sentiment sand that are useful for one primary purpose - as contrary indicators. Here's why:
Without fail, whenever price crosses its 200 day moving average (up or down) a reporter contacts me to inquire as to the importance of the cross. My response is always the same - by itself, price crossing its 200 day moving average is meaningless beyond the fact that it means something to some investors and, therefore, should be used to exploit that faux value (as in act in the opposite direction).*
As for the lower support bound of 1040, this is the type of technical analysis analysis that gives technical analysis a bad rap. How some could construe the significance of 1040 from the accompanying chart** is a wizardry that is beyond my human capabilities. Then again maybe I should consult my ouija board more often than I do.
Next Up, Earnings
As we enter the ever treacherous third quarter of the year, the fundamental driver for a new bear should become evident. Macro economic reports issued beginning next month should provide insight into whether 3Q10 earnings (the single stool holding up the equity markets) will continue their recovery or provide the first signs of earnings disappointments to come.
In light of recent macro economic developments (G20 decision to implode the world economy being at the top of the list) and the risk of fragmented governments and their increasing inability to address the problems of the day individually and collectively in a coordinated fashion, the probabilities that the peak in earnings have been realized (certainly gross margins have) increase significantly. Should this occur, the increasingly bearish message of market (in the form of market breakdowns) then makes considerable sense.
Investment Strategy Implications
Head fakes are the staple of good short term trading opportunities. The breaking of arbitrary lines in the sand is an opportunity for contrarian action.
As noted several times over the past several weeks, the odds are that we are in distributional range with the outcome pointed toward a new bear market. However, as noted many times before, not all markets have signaled a Mega Trend reversal. It is therefore possible that the heretofore strong part of the global markets - the US - will lift the sinking boats of Europe and the drifting junks of Asia, thereby reversing their recent (realized and emerging) Mega Trend bearish signals. The latter is the lower probability.
*See Mega Trend examples in prior postings for the value in price crossing its 200 day moving average.
**Click image to enlarge. I could see 1050ish as a support price point, but 1040?
Wednesday, June 9, 2010
Let me cut to the chase: It’s not about Mr. Obama’s capacity to show emotion beyond a clenched jaw that is missing. It’s about his capacity to lead. Just because someone has the title of leader doesn’t mean he/she is a leader.
In his media book tour for “The Promise”, author Jonathan Alter notes how impressed he was with Obama’s ability to manage the job – to synthesize the information and make an informed decision. This is no doubt due to his God given abilities. But it is also no doubt due to his educational training.
Mr. Obama is an excellently trained Harvard business manager. One of the attributes of a good manager is the ability to work for incremental improvements. Another is to be quite pragmatic. Mr. Obama has both qualities, so eloquently combined in Frank Rich’s commentary this past Sunday – incremental pragmatism. And therein lies the rub.
Being an excellent manager means espousing phrases like “don’t the perfect be the enemy of the good”. Stop and think about that phrase for a moment, then ask yourself if that is something that a leader would ever articulate as the centerpiece of his philosophy?
Perhaps a Chicago trained politician might hold such a core view. Certainly a well trained manager would. But a leader?
Then And Now
An earlier Harvard trained President once faced a crisis involving life and death global implications. Having learned his lesson in relying on the experts around him from a prior episode, this President bucked his experts and literally saved the world from a nuclear holocaust. In the process, a metamorphosis occurred in which the man became the leader he was destined to become. He became The President.
For this young man, it was lessons of The Bay of Pigs that taught him to vigorously question his experts and to chart an innovative solution both in process and outcome. He learned to lead. For the current young man occupying the White House, it is The Bay of Rigs that is testing his mettle.
Hopefully this latest crisis will enable Mr. Obama to find his gut, to transcend the moment, to articulate a world to be, to envision a man on the moon within this decade, to demand that Mr. Gorbachev tear down this wall, to reassure that we have nothing to fear but fear itself, to lead. Then, Mr. Obama may, just may, become President Obama.
Tuesday, June 8, 2010
Note: The following pertains only to the very short term (as in the next few weeks possibly as far into the summer as August).
There are an increasing number of non confirmation signs emerging - both internal (Momentum and MACD) and external (index to index) - to suggest that the corrective phase is coming to an end. Key internal and external divergences along with an escalating amount of chatter re the need for a capitulation (bullish give up) to bring about the end of the correction are precisely the kind of data and investor sentiment one wants to hear at the end of a corrective phase. Moreover, the capitulation talk may turn out to be a false conclusion for the following reasons:
Capitulation presupposes that the correction we are experiencing will be followed by a resumption of the bull market. Given the fact that many other markets (and sectors) have or are in the process of breaking down on a longer term basis, a resumption of a bull market seems the least likely outcome. Rather, once a summer rally (driven by talk of cheap stocks and solid 2Q10 earnings results and fanciful dreams of sustained, organic economic growth) is out of the way, a bear market the likes of which could make the 2008-09 bear market look like a dress rehearsal seems to be the greater likelihood.
Hard To Sit On A One-legged Stool
The single leg supporting the current bull market stool is corporate profits. However, corporate profits are the end point of the macro economic, regulatory, and geo political environment. And, given the recent actions in each arena strongly suggest that corporate profits may not be enough to hold back the tidal wave of conflict and pain (economic and social) headed our way in the next few years. For proof one only need look back at all the optimistic economic and earnings views held in early 2008.
Since most traditional investors rely on conventional tools to make their forecast, often are bottom up oriented, and have precious little ability to quantify the hard to quantify geo political, regulatory, and behavioral finance dynamics (which result in impacting the bottom line results of corporate profits), their optimism can be forgiven.
Investment Strategy Implications
Increasingly, the evidence suggests that the correction we are experiencing is within a larger distributional range that precedes a reversal of the bull market - beginning most likely before the end of the third quarter.
Today may be the day for a respite before the real pain and chaos. If it isn't, at 160 points below its April 23rd high (S&P 500) we are most likely quite close to end of the corrective phase. Those fortunate and/or wise enough to have avoided some of the pain since the spring high should consider putting capital back into the stock market - even if it is only for a likely feeble summer rally. It may the last chance to make money on the long side for a while.
Friday, June 4, 2010
Posted by Vinny Catalano, CFA at 12:29 PM
Thursday, June 3, 2010
In my conversation with the Chief Economist for the National Federation of Independent Business (representing that segment of the US economy that is responsible for most of the job creation - small business) we explore the likely square root recovery for the US economy, the state of small business (not especially good) and how it augers for new job creation (also, not especially good).
Understanding why and how small businesses are in less than stellar shape - well into an economic recovery - and its implications - economic and political - are topics investors in large, publicly-traded companies may want to take some time investigating.
Beyond the Sound Bite podcast interviews can be found at BeyondTheSoundBite.blogspot.com
To listen to this interview, click here
Wednesday, June 2, 2010
The process from bullish to bearish has begun. Like the oil from the gusher in the gulf, the unwelcome first wave of bearish reversals has washed upon the previously pristine bullish shores.
As the first chart* clearly shows, the EAFE (EFA) has satisfied the Mega Trend reversal conditions with price below its moving averages, moving averages crossing (50 day below the 200 day), and both moving averages pointing downward. As the first chart also shows, when a Mega Trend is set it tends to stay in place for many months, usually years. Virtually all other European indices have followed the EAFE's suit. Asian indices are not far beyond, with China poised to join the bad news party (see second chart). Only the US indices stand tall against the global bearish trend. That bravado, however, like much heard from the remnants of the super bull camp, seems poised to fade.
It is possible that the bearish trend signals will be limited to Europe. It is also possible that bullish resistance from the US and Asian indices will hold up and lift their European brethren back into bullish mode. Unfortunately, history does not support such an outcome.
Investment Strategy Implications
It's easy to debate the bullish or bearish view from a fundamental perspective. Expected strong earnings plus average to above average P/E ratios imply a much higher level for stocks. Low interest rates and low inflation also provide bullish fodder.
The opposing camp has its bearish economic ammunition most notably the mountain of debt as far as the eye can see (with its solvency and not just liquidity implications) and a kick the can down the road solution to nearly every difficult economic and public policy problem.
What is less subject to debate is the history illustrated in the above charts. If other indices join the bearish parade, you can kiss the bull market goodbye.
Until then, Yogi Berra said it best, "It ain't over 'til it's over". Most indices have NOT flipped to bearish readings. However, the charts above do not paint a pretty picture of things to come.
*click images to enlarge