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:
Why have stock-picking fund managers had it so tough over the last few years? A lot of people would say high correlation in the stock market, but that’s only part of the story. According to Goldman Sachs strategists, the real culprit is low dispersion. We’ve talked about this topic here before, but to rehash: Dispersion is a measurement of how stocks act in relation to each other, not just to the overall market.
A high-dispersion environment is where a large number of stocks are zigging and zagging drastically. This means that returns and risk factors are all over the map, which, in theory, would allow skilled...
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Click for popup. Clear your browser cache if image is not showing. Comment: Robert Shiller who got the dot-com and housing bubbles right says bonds are next and that’s your gold price spike. www.cnbc.com/...
Date Found: Saturday, 14 February 2015, 02:53:52 AM
Click for popup. Clear your browser cache if image is not showing. Comment: Bill Fleckenstein: Still Not Time to Short the Market - Wait for QE4 - Bill comments that we could easily see another 15-20% correction in the market but that the Fed will either hint at or, more likely, launch Q...
Last week, the major indexes fell back below round-number thresholds that had taken a lot of effort to eclipse. There has been an ongoing ebb-and-flow of capital between risk-on and risk-off, including high sector correlations, which is far from ideal. But at the end of it all, the S&P 500 found itself right back on top of long-standing support and poised for a bounce, and Monday’s action proved yet again that bulls are determined to defend their long-standing uptrend line.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enh...
Former Federal Agents Charged With Bitcoin Money Laundering and Wire Fraud
Agents Were Part of Baltimore’s Silk Road Task Force
Two former federal agents have been charged with wire fraud, money laundering and related offenses for stealing digital currency during their investigation of the Silk Road, an underground black market that al...
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Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
Bullish trades abound in Cypress Semiconductor options today, most notably a massive bull call spread initiated in the July expiry contracts. One strategist appears to have purchased 30,000 of the Jul 16.0 strike calls at a premium of $0.89 each and sold the same number of Jul 19.0 strike calls at a premium of $0.22 apiece. Net premium paid to put on the spread amounts to $0.67 per contract, thus establishing a breakeven share price of $16.67 on the trade. Cypress shares reached a 52-week high of $16.25 back on Friday, March 13th, and would need to rally 4.6% over the current level to exceed the breakeven point of $16.25. The spread generates maximum potential profits of $2.33 per contract in the event that CY shares surge more than 20% in the next four months to reach $19.00 by July expiration. Shar...
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PSW Members - well, what a year for biotechs! The Biotech Index (IBB) is up a whopping 40%, beating the S&P hands down! The healthcare sector has had a number of high flying IPOs, and beat the Tech Sector in total nubmer of IPOs in the past 12 months. What could go wrong?
Phil has given his Secret Santa Inflation Hedges for 2015, and since I have been trying to keep my head above water between work, PSW, and baseball with my boys...it is time that something is put together for PSW on biotechs in 2015.
Cancer and fibrosis remain two of the hottest areas for VC backed biotechs to invest their monies. A number of companies have gone IPO which have drugs/technologies that fight cancer, includin...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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