by phil - July 22nd, 2016 7:26 am
What a week.
Congratulations if you caught our call to short the Dow at 18,500 yesterday morning, that was good for a profit of $500 on each contract as we tested 18,400 in the afternoon – not bad for a day's work! Our other winning short index calls were:
- 2,165 on the S&P Futures (/ES), which fell to 2,155 – up $500 per contract
- 4,650 on the Nasdaq (/NQ), which fell to 4,630 – up $400 per contract
- 1,205 on the Russell (/TF), which fell to 1,198 – up $700 per contact
As you can see from the Dow chart above, we took a few losses poking short on the Dow during the week but it's all worth it when you catch a big winner on the way down. This morning, of course, we're moving back up on no volume – which is why we end up shorting in the first place.
Per our 5% Rule™, the week's fall from 18,550 to 18,400 is 150 points so a weak bounce is 30 points to 18,430 and a strong bounce is 60 points to 18,460 and 18,475 is the 50% line, which is where we'd poke short again with very tight stops and then, once the strong bounce line fails – we'd look for shorting opportunities at the strong bounce lines on all our indexes again.
Despite successfully playing for a bounce on oil and gasoline in yesterday's Live Member Chat Room, we are generally expecting a repeat of last Fall's fall and that is going to be bad news for the broad market as there is already a severe disconnect between Energy Sector stocks and the price of the energy they sell.
Like much of the S&P, a combination of financial engineering (and note that Business Insider is now a lot more critical of Microsoft's (MSFT) earnings than I was on Wednesday) and completely irrational exuberance has led to unrealistic valuations that even the loosest of Fed models won't be able to sustain. With Exxon (XOM) and Chevron (CVX) both heavy Dow…
by ilene - July 21st, 2016 3:10 pm
Courtesy of Dana Lyons
With stocks’ steady drift through all-time high territory, investors’ relative near-term volatility expectations have plummeted to near record lows.
One of the hallmarks of the post-February rally in stocks has been a healthy dose of investor skepticism and anxiety. But for brief periods, e.g., towards the end of April, investors have been slow to embrace the move. Such disbelief is one trait that has helped prolong the intermediate-term rally, now more than 5 months old. In recent weeks, we have mentioned in posts and interviews that perhaps the one thing that will usher in greater enthusiasm on the part of investors is a new high in the major averages. Perversely, that was one potential development, we surmised, that may shift sentiment far enough to the bullish side that it could finally place the intermediate-term rally in jeopardy. That scenario appears to be possibly playing out.
Why do we say that? Well, one piece of evidence suggesting a new-found elevated level of investor complacency comes from the volatility market. One way to judge investor comfort or anxiety is to look at the level of expected stock market volatility via instruments such as the S&P 500 Volatility Index, or VIX. Presently, the VIX is plumbing one of its lowest levels since 2007, so investors are displaying very low expectations for stock market volatility at the moment.
Another way of using volatility to measure the extent of investor nervousness is by comparing near-term volatility expectations versus those farther out. For example, the VIX is actually the 1-month volatility index. Meanwhile, the VXV is the 3-month volatility index. Typically, the VIX will be lower than the VXV as there is less time in the near-term for volatility rises to occur. When investors get especially nervous (usually during a selloff), near-term volatility expectations can actually rise above those farther out, i.e., the VIX/VXV ratio rises above 1.00, or 100%. Conversely, during times of complacency, the VIX can drop to relatively low levels versus the VXV, historically under 0.80, or 80%. That’s where the VIX/VXV ratio currently finds itself – and then some.
As of yesterday, July 19, the ratio stood at 76.0%, one of the most complacent readings since the inception of the VXV in 2007.
by phil - July 21st, 2016 8:32 am
No more easing?
The BOJ's Koroda said this morning that there is "no need and no possibility for helicopter money." That's a pretty firm line in the sand and, as you can see on the Nikkei chart, it led to a very quick 425-point sell-off (2.5%) which is in the process of failing the strong bounce of 170 points from 15,575 to 16,745 and failing the weak bounce again at 16,660 will be a bad sign for the /NKD Futures according to our fabulous 5% Rule™.
We're wathing the Nikkei but we already shorted the Dow and the US indexes in our Live Member Chat Room this morning, when I said to ur Members:
18,500 is lined up with 2,165 on /ES, 4,650 on /NQ and 1,205 on /TF, we want to see them all below to play a short.
I have been saying for some time that the Central Banks have reached the end of the line on QE but clearly the bulls in the market did not believe me and our recent attempts to short the Dow have not ended well but now the ECB has also put rates on hold this morning and that paves the way for the Fed to RAISE rates at their next meeting (next Wednesday, 27th).
We'll see how the markets actually react to the end of the Free Money era. It certainly needed to happen as we've been on a path to insanity and it's a lot better to begin a controlled deceleration of QE than to keep priming the pump until the bubble explodes in our faces. How the markets will react to a mature decision remains to be seen.
Draghi, of course, is still talking a big game, saying the ECB stands ready to do something while, as usual, doing nothing. Those who thought Brexit would lead to more QE will be bitterly disappointed but perhaps their too-early buying frenzy in aniticipation of ECB action was itself a factor in deterring the ECB from acting?
The IMF has issued an urgent call for the G20 to "adopt policies to boost growth and avert a global slowdown" saying Governments should be prepared to provide fiscal stimulus while the…
by ilene - July 20th, 2016 9:28 pm
Courtesy of Nick Colas of Convergex
Viva Las Vegas – The Gambler's Fallacy
The Dow has closed at a record high for nine days in a row, so it (and U.S. equities generally) MUST be ready for a pullback, right? Not so fast. Thinking that reversion to the mean happens swiftly and reliably is something called “The Gambler’s Fallacy.” To borrow from an old capital markets aphorism, things can stay weird longer than you can stay solvent betting against them.
Today we review a recent academic paper that highlights three examples of this mental error, ranging from judges hearing asylum requests to baseball umpires and bank loan officers. All of them make the same basic mistake in real-life situations despite their professional credentials and experience: assuming that the next decision is somehow linked to the previous one. Umps call marginal strikes after calling a ball, and judges decline refugee status more often after granting the previous person asylum during a day of hearings. The key lesson: every decision you make is unique, and should be unrelated to prior judgements.
* * *
During the summer of 1891, a small time British con man named Charles Wells took a holiday to the south of France. Like many tourists of the day, he frequented the famous casino in Monte Carlo. Unlike many tourists of his day, however, he managed to “Break the bank” – depleting the table where he was playing of all its reserves – several times. He reportedly took home as much as $8 million in today’s money, although his reputation as a swindler both before and after the event left some doubt about whether the whole thing was a publicity stunt.
Fast forward a few years to August 18, 1913, and something equally unexpected occurred: the roulette wheel came up with a black number 26 times in a row. Now, the casino had been in operation for decades by now, so a streaky wheel should not have been terribly remarkable. But instead of taking it stride, the crowds that night bet ever large sums during this run, fully expecting a red number to come up. It finally did, but not before the bank had broken some of the gamblers.
The event gave us term “Monte Carlo fallacy”, which has morphed into the “gambler’s
by ilene - July 20th, 2016 8:30 pm
Crude oil is the world's most actively traded commodity (and today's chaos evidenced that perfectly), and oil-related markets are a staple for traders, hedgers, investors around the globe. The below infographic, put together by Aspect, covers the history of crude oil trading, while also highlighting the major events that have shaped the landscape of the oil market as we know it today.
As VisualCapitalist's Jeff Desjardins points out, the infographic serves as the perfect primer for all the questions about oil that you had, yet were afraid to ask. It also illustrates the impact that unexpected geopolitical events can have on the oil price – and how this volatility can be contagious to other global markets.
by phil - July 20th, 2016 8:23 am
Generally Accepted Accounted Principles (GAAP).
According to Investopedia: "GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements. If a financial statement is not prepared using GAAP principles, be very wary!"
Let's keep those guidlines in mind as we discuss Microsoft's (MSFT) earnings last night as they are a fine expample of the kind of BULLSHIT that is permeating the market these days. MSFT's GAAP Revenue was $20.6Bn and GAAP Earnings were 0.39 per share, missing by a mile but, after adding back "Windows 10 deferrals to revenue" and "impairment, integration and restructuring charges", they are able to boost their non-GAAP reported earnings to $22.6Bn and that extra $2Bn of revenues, which were actual expenses but have been erasted from the report, drops straight to the non-GAAP bottom line and almost doubled non-GAAP earnings to 0.69/share – a nice beat!
And that's not the end of it as MSFT also made non-GAAP (non-Generally Accepted) adjustments to their taxes and reports that they will only pay $225M on $3.3Bn in earnings (7%). We can be outraged about this on many levels but the earnings weren't real so it's really not fair to expect them to pay taxes on their fake earnings, is it? It is, however, "fair" to expect invesors to pay $55 for the stock this morning, up from $53 yesterday based on all these fake earnings. After all, the investors are just suckers, born every minute and growing up to hold the bags.
Microsoft is part of the Big Con, which is moving the whole market to all-time highs. It's a significant stock on all the indexes so it will lead us higher this morning – even as the broad market continues to sell off as the big boys run for the exits during this "rally". By holding up just a few large-cap stocks, the Fund Managers and Banksters can cover their tracks as they sell off the rest of their holdings – all the while…
by ilene - July 19th, 2016 8:09 pm
Courtesy of Michael Batnick, The Irrelevant Investor
Everybody who ever invested a dime in the market had a mentor. And if they didn’t have one when they started, it probably didn’t take long before they went searching for help. Jesse Livermore said “there is nothing new on Wall Street,” and because there is nothing new, lessons learned 10, 20, and even 100 years ago are as true today as they were the day they were written. And because of this, you don’t require any physical one-on-one time with somebody for them to be your mentor. Everything they would tell you to your face can be found in their writing.
I want to share the people who have had the biggest influence on me. This list could easily be four times as long, but to avoid this post becoming a book, I had to draw a line somewhere.
This list begins with the godfather Jack Bogle, founder of The Vanguard Group. Bogle taught me the power of indexing, to keep costs down, and to think long-term. Here are two brilliant quotes from The Little Book of Common Sense Investing:
Don’t look for the needle in the haystack. Just buy the haystack!
The stock market is a giant distraction to the business of investing.
And this is Bogle on investor behavior, from Common Sense On Mutual Funds:
When stock prices are high, investors want to jump on the bandwagon; when stocks are on the bargain counter, it is difficult to give them away.
“Adam Smith’s” The Money Game is one of my favorite investment books ever written. It was originally published in 1967, and aside from technological changes, you would think it was written today. Smith taught me how much the market, and even more so the investor, are influenced by psychology. Here he is, from his 1967 classic:
A stock is for all practical purposes, a piece of paper that sits in a bank vault. Most likely you will never see it. It may or may not have an Intrinsic Value; what it is worth on any given
by ilene - July 19th, 2016 4:30 pm
Courtesy of Joshua M Brown
Jon Krinsky dropped a beauty for institutional clients of MKM Partners this weekend, refuting the five most common arguments from the bears for why last week’s new record highs represent a market top. Jon is a technician, so if the picture changes, so will his views, but for now he believes traders should be in dip-buying mode rather than playing for a deep pullback.
Below, five common bear arguments and Jon’s refutations:
#1: The Market Is Overbought
While the market is overbought on a very short-term basis, longer-term momentum is far from overbought, and monthly MACD is close to giving a bullish crossover.
#2: The Market Is Expensive
While we don’t use valuation as part of our analysis, we realize that some may consider the market ‘expensive’ here. There have been many times throughout the last 60 years, however, when the market was ‘expensive’ and still had plenty of runway.
#3: Emerging Markets Are Rolling Over
The MSCI Emerging Market Index is up 9.28% YTD, above all of its moving averages, and has the highest percentage of components above their 200 DMA since early 2014.
#4: The Transports Haven’t Confirmed
They also didn’t confirm in early 1995, until they did. The TRAN Index is up ~25% off its lows, has broken a two-year downtrend, and the cumulative advance-decline line is nearly at an all-time high.
#5: Sentiment Is Frothy
Short-term sentiment is frothy, but longer-term, is far from it, in our view.
Here’s how he tackles #4, the transports non-confirmation: It doesn’t matter. Or, it doesn’t matter yet.
There have been other instances where the Dow Transports negatively diverged from a DJIA bull market and then converged much later. Take 1995, for example, after which the S&P 500 (and Dow Jones Industrials and QQQ’s) literally exploded higher for the next four years…
Five Bearish Arguments… And Our Rebuttal To Them
MKM Partners – July 17th 2016
by phil - July 19th, 2016 8:16 am
Watch Germany's DAX closely:
That 10,000 line is hyper-critical – it's their Must Hold Line and, as you can see on the daily chart – it's barely been holding and just failed again this morning as Germany's ZEW Economic Sentiment survey showed a horriffic post-Brexit (July 4-18) drop to -6.8 from +19.2 in June and miles below the forecast of leading economorons, who expected +9 as the DAX rallied 800 points during the period in question.
Even worse was the assessment of Eurozone Sentiment, which fell from 20.2 in June to -14.7 in July. This indicates that Europe is not out of the woods just yet and we, at PSW, certainly got that impression from the way the Euro Stoxx Index failed to get back over 3,000 last week but, so far, we are still alone in our bearish veiw of the market.
Volume on the S&P ETF (SPY) yesterday was 54M, a new record low for the year and about half the average volume for 2016, which is less than 2/3 of 2015s average volume so, if you are buying stocks – you're pretty much alone these days. I gave a little lecture on why low volumes lead to stock rallies in our Live Trading Webinar and it's things like this that keep us in CASH!!! and on the sidelines – because this whole move up (8.5%) since the Brexit downturn has come on extremely low volume.
As you can see from Dave Fry's note on Friday's S&P chart, volumes have been going down and down and the only "people" buying are the Central Banksters, who are desperately propping up the markets lest people begin to panic and start causing liquidity crises which the CBs are in no condition to deal with at the moment.
Unfortunately, while it's easy enough to push the market to record highs when Central Banks step in and begin buying up equities – sustaining them there is quite another story and here's why:
Let's say you have a car lot with 100 VW Beetle Convertibles and you bought them for $20,000 and you hope to sell them for
by ilene - July 18th, 2016 10:38 pm
Courtesy of Michael Batnick, The Irrelevant Investor
The amount of time between the scary events taking place in our country and all over the world seems to be narrowing at a rapid pace. The human tragedies that the world is experiencing are unthinkable and beyond sad to watch. But looking at the market’s response to crisis, we learn that no financial decisions, specifically relating to your portfolio, should be made on the basis of geopolitical uncertainty.
I was surprised to see the futures open flat last night, and trade higher this morning. But I shouldn’t have been, because a quick look at history reaffirms that events outside the market just do not get the response from stocks that you might imagine.
Here are a few examples.
- The Dow Jones Industrial Average had its best year ever in the first full year after World War I broke out. In 1915, it gained 81.7%. This gain has never come close to being duplicated, and will likely stand as an all-time record.
- U.S. stocks gained 15% in the two weeks following Hitler’s invasion of Poland.
- J.F.K was assassinated on Friday, November 22, 1963. On Monday the stock market was closed and when it reopened on Tuesday it gained 3.98%. This was the strongest move in a year and a half and is stronger than 99% of all days on record until that point. Also, in the six previous years, a move this strong had only happened one other time. The Dow finished 1963 finished up 17%.
- In 1968, the day after M.L.K was assassinated, stocks fell 0.59%. Then they rose over the next seven days. 61 days later, R.F.K was assassinated and stocks fell half a percent that day, then rose each of the next four days. The Dow gained 4% that year.
- Stocks were down less than 1% the day after Nixon resigned. Granted it was in the teeth of a bear market that would fall another 26% over the next four months, but the immediate reaction to the first and only presidential resignation seems rather tame.