Where are we now?
August 21st, 2011 9:51 PM EST
It’s been a few weeks since I posted on here so I am more than due to share a little color on the market. A few days after I made my previous post (“Let’s Talk About Something Else…”) I thought a follow up on how many more stocks were trading down significantly (down 20% or more) after earnings would be a good post to write but as the market collapsed that idea quickly moved from being interesting and enlightening to being blatantly obvious. No question that stocks have taken significant hits over the last three weeks. From a technical perspective there is no chart that serves as a better comparison than the crash of ’87. The down move is not quite as large and has certainly occurred over a period of time longer than a single day.
-- On a side note, this serves as an excellent example of how computers and algorithmic trading are improving our markets and making liquidity more available, even in times of panic. I implore everyone to ignore the critics of high-frequency trading. I do not pursue any algorithmic or HFT strategies but from talking to many of those who do it seems incredibly obvious that when pressed, the critics of HFT, a population that seems to be growing exponentially, is unable to actually explain how the object of their criticism works and explain why criticism is necessary other than poor performance of their portfolios. I’m sure this topic will become frustrating enough at some point to be its own post but that’s another day.--
……..Anyway, the point I really want to hit on here is that I keep hearing a lot of commentary about a search for “the bottom”. It was only three weeks ago that equity markets were a mere 1.5% off their bull market highs. Now we find ourselves about 16% lower and extremely volatile. These sorts of moves don’t tend to resolve themselves overnight. That being said, in ’87 we did actually find a bottom only a day after the crash, but the months that ensued after setting this bottom were nothing more than a choppy range slightly above the low (not a market that anyone would be upsetting about not being involved in). I am not looking for a bottom in a market like this, there is far too much indecisiveness in this tape to consider taking on risk. We can go lower or we can churn sideways but at this point a sharp move higher seems very unlikely particularly considering how many stocks are reporting very disappointing numbers. Don’t rush to find a bottom here, those with patience will be rewarded.
-James
Let's Talk About Something Else...
July 31st, 2011 6:35 PM EST
The last few weeks have caused many of us, myself included, to focus on the headlines rather than what is going on in the market “under the hood”. Rather than continuing to harp on the ever-so frustration topics like the debt ceiling and the destabilization of the Euro-zone, let us instead focus on the objective price action of the US equity market.
Now that a majority of US companies have already reported their Q2 results we find ourselves in an interesting position. While we continue to see a majority of companies topping earnings estimates the number of stocks reacting positively to earnings results has paled in comparison to the previous few quarters. Over the past week, 519 companies with a market capitalization of $300 million or greater reported earnings. Of these stocks, only 15 of them gained more than 10% last week while 82 of them fell 10% or more. To go even further, only 2 stocks rose more than 20% compared to 15 that fell by the same amount or more. Granted this was one of the worst weeks for stocks in a year or more with the S&P 500 falling 3.9%, but when looking to take a contrarian approach to the broader market’s action a study like this is typically where one can find hope. That isn’t the case this time around.
While bulls can remain hopeful that this is just another instance of the unstable macro picture blurring the micro fundamentals, hopefulness hasn’t proven to be a successful investment strategy in the past. Thus far this earnings season has caused thinning leadership, much as one might expect this far into a bull market, but unnerving nonetheless. Not to say that a rally from here would be improbable, but this earnings season seems to be just another element adding to the pool of murky uncertainty that makes any prediction going forward that much more difficult to justify.
-James
Foresight is 20/20?
July 24th, 2011 6:06 PM EST
Part of my weekly routine involves a Sunday that is more or less dominated by reading various news articles, research reports, blogs, etc. A few times a year I will find that all of my sources of information have decided to key on one single issue that week. A few months ago I probably read 30 articles calling for a top in silver. Today it’s the US debt ceiling. It shouldn’t come as a surprise as this has been an issue in the headlines for several weeks now but it has become so large that the mere thought of authoring any sort of market commentary without a reference to it would seem uncanny at this point.
Whether it’s coming from a blogger or a manager of a multibillion-dollar hedge fund the message seems to be the same. The US cannot default and if there isn’t an agreement the market’s reaction is literally unfathomable. Not that the reaction would be a definitive collapse but rather unfathomable in the sense that no one is quite sure exactly how we would react and to what extreme. We have based models for decades around the idea of a risk free rate that in an instant could become something that –while still relatively safe—would certainly constitute an investment involving a measurable amount of risk larger than the previously miniscule assessment. Jason Zweig from the Wall Street Journal referenced the situation as being even more rare than the “Black Swan” tail events coined by Nassim Taleb, referring to a possible US default as a “Neon Swan”, an event we never would have imagined in our wildest dreams. [Link]
In the boom and bust economy that has epitomized the last decade, large macro “game changing” events like this seem to occur much more often than they should. That shouldn’t be a shock to anyone at this point. This time around things are a little bit more interesting though. Frequently after the collapse we see the critics come out of the woodwork and proclaim, “this could have been prevented”. Much of this typically comes from politicians or other individuals who are equally inept solvers of problems without the benefit of hindsight. Rather than playing Monday morning quarterback this time around the problem is sitting right in front of us and its identity and complexity is a secret to no one. My question is: “Are we seriously going to let ourselves fall into the abyss when we have seen it dead ahead of us for months?”
If you had asked me a month ago about if the debt ceiling would be raised I would have said:
They will figure out a deal. The people in Washington are dumb but they aren’t that dumb. It will come down to the wire, not because it has to, but because at this point neither side wants to appear to be the one that “backs down”.
If you had asked me again 2 weeks ago:
They will figure out a deal. Neither side can look like they are backing down right now, but in the end they will figure it out.
If you ask me right now:
Are they seriously going to let this happen?!
Well so far my initial thesis has yet to be proven false and perhaps I am falling victim to the political theatre that that I expected to encounter. I do in fact hope that all of this tension is nothing more than “political theatre”, but at some point markets will be forced to capitulate if there isn’t at least a small amount of certainty introduced to the equation.
-James
QE, PIIGS, Debt Ceiling, etc.
July 16th, 2011 5:42 PM EST
A few months ago I made a change in my career moving from one trading firm to another. Making a move like that involves a lot of adapting to different elements but there has been one element that I never expected to affect me so much. I went from a trading floor that played CNBC all day every day to a trading floor that plays CNBC all day every day WITH AUDIO. The sound comes out of the same speaker as the news wire and there is no way to turn it off. Very quickly the anchors became my “co-workers” as I began to sarcastically banter with them as if I were expecting a response. i.e.
Analyst: "Yeah, I am really bullish on it. In fact my price target is probably too low and we think it could go much higher.”
Me: ”Maybe you should raise your price target.”
Occasionally I find a likeminded person that I can emphatically agree with but responding emphatically to someone on television is a much stranger, almost disturbing, social response when compared to snide comments made under my breath.
While we have spent the past month or so since LinkedIn’s IPO listening to the latest talk about the internet bubble 2.0 we seem to be caught in another bubble as well. The macroeconomic news bubble. The result isn’t a move in asset prices in any one direction but rather the increasing amount of market moving information showcased by our various forms of media. Over the last few months we have frequently seen stocks make large, highly correlated moves upon the release of various pieces of data from various parts of the world. Of course, to a certain degree this has always been true as the data being released does and should have an effect on the market. However, recently the number of pieces of data has spiked and their immediate effects on the market have been increasingly significant to say the least.
We saw the market drubbed throughout all of June by poor economic numbers only to see the market end the month with a rally that left our market so overbought that it seemed to be a clear catalytic sign that the market had a chance to begin a new rally higher. (In the last 12 years—all the data that I can find—the Nasdaq McClellan Oscillator has only reached an overbought level that high once, March 26, 2009… you know what happened next.) The timing seemed perfectly contrarian as it corresponded with the end of QE2. The rally was topped by a disappointing non-farm pay roll numbers that, despite causing futures to careen lower ahead of the open, left most leading stocks positive, closing at their highs. After all these bullish signals we opened much lower this past Monday on new concerns over Italy, a reminder of the current power that macro events will have on this market.
Needless to say over the last 5 months we have seen a lot. The earthquake in Japan, riots in Greece, downgrades across the Eurozone, concerns over Italy, and increasingly messy situation that we have in our own capital over the debt ceiling. While it appears that the long-term effects of these situations won’t be known with certainty anytime soon I still believe the diligent and patient will be rewarded when we eventually exit this choppy macro news driven tape. The market seems strangely reminiscent of that around this time last summer as we found ourselves stuck between 1040 and 1130 in the S&P. Every time we got near 1130 things looked great and leaders looked set to break out only to be whacked back down to the 1040 level where the sentiment would deteriorate significantly only to rise again. It was a particularly amusing time to listen to technical analysts as they claimed that the market had made a head-and-shoulders pattern, only to state a few weeks later that the market was then an inverse head-and-shoulders pattern. I expect we will see similar uncertainty ahead as these macro events to continue to unfold. My plan going forward is to take risk on the opportunities that present themselves to me in the coming weeks but not fight any move caused by macro events, the swings have become too great that they are more than merely “shakeouts”. There will be other opportunities in the months ahead as corporate earnings this month will hopefully begin the popping of this macro news bubble and return some normalcy to the motion of the market.
-James
Welcome to my new website...
July 7th, 2011 7:55 PM EST
-James
