Theory: the dumb money (that’s us) has left the party leaving the bots (smart money) to pass the stocks back and forth between themselves. And to mix metaphors, the bots act like a herd all pretty much stampeding one way or another. While retail investors seek not to get trampled another time. – Ilene
The stock market has turned into a schizophrenic herd of sheep. Correlations have entirely converged in recent months as money simply flows from bullish to bearish depending on the current mood of our bi-polar friend. Jeff Saut of Raymond James says it is in large part due to the small investor throwing in the towel:
“The chart on page 3 shows the correlation of S&P 500 stocks to the S&P 500 Index. Studying the chart one finds that the correlation from September 2009 through early May 2010 ranged between 55 – 65. However, following the May 6th “flash crash” the correlation leaps to ~78 and eventually ~82, which is indeed the highest correlation since the 1987 crash. So what caused this fairly rare event? In my opinion it is because the retail investor – disgusted with high-frequency trading, dark pools, trading huddles, inter-market sweep orders, etc. – simply left the game, leaving the “pros” to trade among themselves. Obviously, when the alleged “dumb money” left the party correlation had to rise. Adding to the situation has been Exchange-Traded Funds (ETFs). To wit, when volume increases in say the Powershares Consumer Discretionary ETF (PEZ/$21.08), that ETF automatically goes in and buys ALL 60 of the mid-cap stocks within the fund. Plainly, that causes correlation to rise.”
I think it’s even simpler than that. This is classic herd mentality. The entire herd is either all grazing or all running scared at the same. Currently, the herd is grazing happily with not a care in the world. But don’t be fooled – when something spooks them you’ll get trampled if you don’t run with them…..
In today’s segment of bull versus bear we pit a bullish Jeff Saut against an ultra bearish Nouriel Roubini. Mr. Saut, who helps oversee $235B at Raymond James, says there is not a whole lot of downside to U.S. stocks and that there is a “bubble in pessimism”. Roubini, on the other hand, believes we are on the verge of a double dip.
Interesting commentary from Jeff Saut, Chief Equity Strategist at Raymond James this morning on the old investment saying “sell in May and go away.” Mr. Saut believes investors should be selling before May in anticipation of what other investors might do:
“Obviously we have modified that old axiom this morning given our statement – “Don’t wait for May to go away!” Nevertheless, despite having been too soon’ly cautious since S&P 1150 – 1160, which is tantamount to being wrong, we are “stepping up” our cautionary counsel this week.”
Saut’s cautious tone is driven by a series of technical and sentiment factors that are often followed by weaker market action:
“Our increased caution is driven by a number of metrics. To wit, preliminary data suggests last Friday was the first 90% Downside Day since February, our sentiment gauges are back to as bullish as they were in 1987 (read that bearishly), the CBOE equity put/call ratio is at 0.32, for its heaviest “call volume” relative to “put volume” since August of 2000, stocks are the most overbought since the rally began in March 2009, some of the leading stocks are not responding to good news, Thursday was session 34 in the “buying stampede” that began on February 26th (rarely do such skeins last more than 30 sessions), we’ve gotten that peak-a-boo “look” into the long envisioned target zone of 1200 – 1250, volatility is back to the complacent 2008 levels, and the list goes on.”
But that doesn’t mean Saut is turning full-blown bearish. He still sees upside in the market following a near-term correction:
“As for the ‘here and now,’ we are increasingly cautious, believing a near-term “top” in the equity markets has been registered. Longer-term, we remain bullish, thinking the profit-cycle recovery is alive and well. To that point, it’s worth considering that bottom-up operating earnings peaked in 2007 at ~$91 per share for the S&P 500 (SPX/1192.13). And, except for Japan, price-to-peak earnings power (PPE) has always made new highs, cycle after cycle. Again, as the good folks at GaveKal note, ‘Except during the bubble years of 1997 – 2001, the PPE for the SPX has fluctuated in a range of 10x to 20x (peak earnings);
Raymond James strategist Jeff Saut continues to present a cautious tone in his first research note of the year
Last Monday we wrote, "As we enter the New Year, we are once again turning cautious because the Treasury market is breaking down (higher rates) and the U.S. dollar is rallying. . . . Therefore, we think it prudent to ‘bank’ some trading profits and hedge some investment positions as we approach the new year."
Moreover, one of the lessons we have learned is that the beginning of a new year is often punctuated with head fakes, both on the upside as well as the downside. One of the greatest upside head fakes was in January 1973 when in the first two weeks of that year the DJIA rallied to a new all-time high of 1051.70 before sliding ~20%. While we are clearly not predicting that, what we have indeed experienced since the March "lows" is the second greatest percentage rally (69%), adjusted for time (nine months), since the 1933 rally. Following that 1933 explosion of 116% in just five months came a pretty decent downside correction. Since we tend to be "odds players," prudence suggests some caution is again warranted.
“we think the upside should continue to be driven by ‘game theory,’ which suggests that the under-invested institutional portfolio managers have to buy stocks into year-end driven by their under-performance, their subsequent ‘bonus risk’, and ultimately their ‘job risk.’ Verily, many of the portfolio managers we know remain under extreme pressure to commit their outsized cash positions in an attempt to ‘catch up’ to their benchmarks between now and year-end (see the nearby Credit Suisse institutional cash versus retail cash on the sidelines chart).”
“As the S&P 500 traded out to new reaction ‘highs’ in the first part of last week we heard a cacophony of crybabies. First was Meredith Whiney, banking analyst now turned strategist, who stated, ‘I have not been this bearish in over a year!’ One-upping her was Nouriel Roubini who exclaimed, ‘The worst is yet to come’….Despite such cantankerous cries, we have indeed entered the strongest seasonality of the year and we remain constructive. As the sagacious Bespoke Investment Group writes, “Since 1941, the Dow has averaged a gain of 0.50% in the week before Thanksgiving.” That said, we would not like to see the S&P 500 break below 1083. And speaking of breaking down, the Japanese stock market is breaking down and we are close to ‘uncle points’ on those recommendations.”
How does Saut recommend playing the year-end rally? Saut has been mindful of the recent divergence between large caps and small caps. He believes the trend will continue as breadth narrows and investors reallocate capital from the best performers to a bit of more defensive posture. This means large caps will outperform. In particular, he likes pharma stocks:
Apache Corporation (NYSE, Nasdaq: APA) and its subsidiaries today announced an agreement to sell producing oil and gas assets in the Deep Basin area of western Alberta and British Columbia, Canada, for $374 million.
Incremental to Apache's earlier $2 billion share re-purchase announcement, the company plans to use the proceeds of this transaction to buy back Apache common shares under the 30-million-share repurchase program that was authorized by Apache's Board of Directors in 2013.
Apache is selling primarily dry gas-producing properties comprising 622,600 gross acres (328,400 net acres) in the Ojay, Noel and Wapiti areas in Alberta and British Columbia. In the Wapiti area, Apache will retain 100 percent of its working interest in horizons below the Cre...
“However, both indexes are at or near MAJOR support levels. That means that we are ‘in the zone’ for a bounce of some sort in the next couple of days.” And a bounce is exactly what we got: But as you can see even with last week’s bounce, we are still locked in a downtrend. As we look ahead to next week, should we break out of the downtrend to the upside, we’ll want to take advantage of buying stocks doing the same. And should we remain in a downtrend, we want to short stocks that are also locked in downtrends. As we’ve said before: Success in the market comes from trading stocks in tandem with the indexes. Should the markets break higher, then FF is an excellent long side candidate: Here we have a leading stock that like the Nasdaq is in a min...
Brave souls who write about stocks always subject themselves to potential embarrassment if they take a stand on the future movement of their selected company. Including both a price target and a time horizon makes you accountable if things don’t go as predicted.
For that reason many media pundits much prefer to explain what’s already happened rather than sticking their necks out. They would rather justify the (supposed) reason...
There are many creative ways to screw up your retirement. Let me show you how it’s done.
Supporting adult children. My wife Jo and I have friends with an unmarried, unemployed daughter who had a child. Our friends adopted their grandchild and are now in their late sixties raising a kid in grade school. The same daughter had a second child, and they adopted that one too. When she announced she was pregnant a third time, they finally said, “Enough! It’s time for a third-party adoption.”
Last time I spoke with them, their unemployed daughter and her boyfriend were living in their basement, neither contributing financially nor lifting a finger around the house. What began as a temp...
In the days before the Geneva "de-escalation" conference (and coincidentally, days after the secret visit of CIA director Brennan to Kiev), the top story across western media was the "undisputed" proof that east-Ukraine, populated by "terrorist separatists", is preparing to unleash a neo-nazi wave against local jews, when a leaflet was unveiled, beckoning the Jewish population to register and declare their assets.
Shares in Chipotle Mexican Grill Inc. (Ticker: CMG) opened higher on Thursday morning, rising more than 6.0% to $589.00, after the restaurant operator reported better than expected first-quarter sales ahead of the opening bell. But, the stock began to falter just before lunchtime on concerns the burrito-maker will increase menu prices for the first time in three years. The price of Chipotle’s shares have since fallen into negative territory and currently trade down 3.5% on the session at $532.89 as of 1:50 p.m. ET.
Last week’s market performance was nasty again, especially for the Small-cap Growth style/cap, down 4%. Large-caps faired the best, losing only 2.7%. That’s ugly and today’s market seemed likely to be uglier today with escalating tensions over the weekend in Ukraine.
But once again, positive economic trumped the beating of the war drums. Retail Sales jumped up 1.1% over a projected 0.8% and last month’s tepid 0.3%, which was revised up to 0.7%. While autos led, sales were up solidly overall. Business inventories were about as expected with a positive tone. Citigroup (C) handily beat estimates to add to the morning’s surprises. As a result, the market was positive through most of the day, led by the DJI, up 0.91%, and the S&P 500, up 0.82%. NASDAQ had a less...
[Facebook] The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process.
The authorisation from Ireland’s central bank to become an “e-money” institution would allow ...
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I just wanted to be sure you saw this. There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.
If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.
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Ladies and Gentlemen, hobos and tramps,
Cross-eyed mosquitoes, and Bow-legged ants,
I come before you, To stand behind you,
To tell you something, I know nothing about.
And so the circus begins in Union Square, San Francisco for this weeks JP Morgan Healthcare Conference. Will the momentum from 2013, which carried the S&P Spider Biotech ETF to all time highs, carry on in 2014? The Biotech ETF beat the S&P by better than 3 points.
As I noted in my previous post, Biotechs Galore - IPOs and More, biotechs were rushing to IPOs so that venture capitalists could unwind their holdings (funds are usually 5-7 years), as well as take advantage of the opportune moment...
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