"Even a dead cat will bounce if dropped from high enough." - An old trading saying
The dead cat bounce is a term used to describe a rally in a bear market. After the market craters there is often a short term rally that can suck people into buying stocks thinking that the worst is over and that the market has finally reached the bottom. Backing this up will be the talking heads on Wall Street and television to talk their book, encouraging people to buy stocks "on the cheap". The focus of their discussion is normally on where the stocks were a few days or weeks ago and how a recovery is imminent. (I can see them hanging their "buy now while cheap" signs out their windows now.) There is never any discussion on where the stock could go if the bludgeoning continues and more often than not it is a lot lower than people can even imagine. So let's take a look at the dead cat bounce and see if this is one of those events or not.
First off the market has not entered a formal bear market or even a correction yet. A correction being a fall of 10% or more which while briefly touched during the trading session of the 25th did not stick as the market rallied sharply from that level and closed well off the lows. As we are not formally in a correction there is a chance that the bounce is sustainable as the sell off could be just that, a sell off caused by the China rout and we are back to business as normal.
The next two thing to look at are the magnitude and age of the sell off. While relatively deep the sell off still did not enter a correction so by this metric it may be more than a bounce. Considering the short period of a week it is very young and therefore has not established itself as a longer term bear market. As the "correction" (assuming that is what we are witnessing) is an infant there is a good chance that the market has legs and can do more than just bounce from here but can somehow spring back to life.
A fourth thing to consider is which stocks were responsible for the recovery rally. Looking across the board it appears that it was a short covering rally as stocks like Arch Coal gained 33% while Google only gained 3%. The former has a very concentrated short interest (sellers that have no stock in the company and are betting that the price will fall) while the latter has very little short interest. Short covering is considered a key ingredient to dead cat bounces as they are not true buyers of the stocks but are just covering their trades to lock in profits. Once their covering ends the market resumes its previous trend so this metric checks the box of a dead cat bounce.
The final thing to consider is the underlying fundamentals of the market. With the long unchecked upward trend well overdue for a correction, stock price valuations way above normal, China's economy cratering before our eyes, Europe and Japan weak and the Federal Reserve up against the wall it looks very much to me like the dead cat bounce wins the day.
Regardless of whether I am right or wrong on my prediction you should ask yourself, based on the week's massive volatility is this a market that I really want to play in and if you do is it a speculative investment or something that you truly believe in? My guess is that anyone that is willing to buy stocks here is gambling with their investment dollars and that is a sure way to the poor farm unless you are a seasoned professional in which case you would be short the market.
Friday, August 28, 2015
Friday, August 21, 2015
The Market Sobers Up
"Statistics are used much like a drunk uses a lamppost, for support, not illumination." - Vin Scully
After a party that has lasted almost seven years it is looking more and more like the market is waking up to reality. After the binge on easy money and low interest rates of the past few years it looks like there is a realization that the economy is too weak to handle an interest rate hike and that if the Federal Reserve does not hike rates soon things will get out of control on the inflation front. In other words market participants are finally realizing that the Federal Reserve is boxed in and this is making market participants nervous to say the least.
Now while I could go on about how an interest rate hike will have negative impacts on earnings, housing and the market I do not plan to use the lamppost for support as I have done that at length in previous blogs. What I can say is that the market appears to be hanging on to a very weak thread and that the correction so long overdue is looking more and more probable by the day. On a trading basis the level of support for the S&P 500 is 2046.50. This level was briefly tagged and broken on Thursday and should a sustained rally not ensue on Friday things could get ugly for the simple reason that margin debt is at the highest level ever recorded and the vast majority of that money will exit the market en masse at any further sign of weakness.
For those of you still interested in staying in the market (for reasons that I cannot understand other than you once again wish to be beaten up by another vicious market draw down) I would hope that you will move a large portion of your investments to gold miners and possibly their silver brethren. These are stocks that are down 80-90% from their highs and should the market implode they will benefit from a rise in the value of gold. Furthermore the ratio between the gold price and the price of silver is wide and should mean that silver will appreciate faster than gold. Still silver is a squirmy beast not easily tamed so expect an adventure in that market but that to me is the only place to turn right now.
Outside of that ensure that you do not get sucked in by the lamppost leaning drunks who throw any kind of statistic at you to make you believe things are going well. They are not, not in the United States, not in China, not in Europe and not in Japan. Furthermore the market is due a correction so ensure you do your homework and sidestep the impending mess.
After a party that has lasted almost seven years it is looking more and more like the market is waking up to reality. After the binge on easy money and low interest rates of the past few years it looks like there is a realization that the economy is too weak to handle an interest rate hike and that if the Federal Reserve does not hike rates soon things will get out of control on the inflation front. In other words market participants are finally realizing that the Federal Reserve is boxed in and this is making market participants nervous to say the least.
Now while I could go on about how an interest rate hike will have negative impacts on earnings, housing and the market I do not plan to use the lamppost for support as I have done that at length in previous blogs. What I can say is that the market appears to be hanging on to a very weak thread and that the correction so long overdue is looking more and more probable by the day. On a trading basis the level of support for the S&P 500 is 2046.50. This level was briefly tagged and broken on Thursday and should a sustained rally not ensue on Friday things could get ugly for the simple reason that margin debt is at the highest level ever recorded and the vast majority of that money will exit the market en masse at any further sign of weakness.
For those of you still interested in staying in the market (for reasons that I cannot understand other than you once again wish to be beaten up by another vicious market draw down) I would hope that you will move a large portion of your investments to gold miners and possibly their silver brethren. These are stocks that are down 80-90% from their highs and should the market implode they will benefit from a rise in the value of gold. Furthermore the ratio between the gold price and the price of silver is wide and should mean that silver will appreciate faster than gold. Still silver is a squirmy beast not easily tamed so expect an adventure in that market but that to me is the only place to turn right now.
Outside of that ensure that you do not get sucked in by the lamppost leaning drunks who throw any kind of statistic at you to make you believe things are going well. They are not, not in the United States, not in China, not in Europe and not in Japan. Furthermore the market is due a correction so ensure you do your homework and sidestep the impending mess.
Friday, August 14, 2015
A Gun Fight
I couldn't resist inserting this link to the You Tube clip of Indiana Jones taking on the sword wielding bad guy. The rule of course is never bring a knife to a gun fight!
https://www.youtube.com/watch?v=7YyBtMxZgQs
So while the market tries to blow off the Chinese devaluation of the yuan (twice in two days) it is clear that the Federal Reserve is bringing its sword to the gun fight that is currency devaluation. Already this year the dollar has surged against a basket of currencies (see graph below) but apparently the Chinese economy, the second largest in the world, needs more help to try to resume its growth. (This is a five year graph with 2015 in the last block of the graph.)
This dollar surge is hurting the large companies that represent the S&P 500 for the simple reason that the price of US goods and services when priced in dollars is becoming more expensive throughout the globe. Already we are seeing companies from Apple to Tesla complain of the negative effects of the dollar rise and all are ratcheting their growth projections down. Behind this slowdown are the announcements of large scale layoffs but according to the Wall Street Journal this morning more than 80% of economists expect the Federal Reserve to raise interest rates in September.
Now while I do not expect them to raise rates they might just to show the world how tough they are but that would be akin to the sword wielder in the clip above. Raising rates would fuel a further expansion in the value of the dollar and would hurt an already slowing economy even further. Not only would it hurt what is left of economic sales growth outside of the US but it would hurt internal growth as well as a rate increase would feed negatively into housing and investment.
It is interesting then that in light of this and the impending interest rate raise that the bond market is gaining momentum to the upside lowering the yield on the ten year note to levels not seen in months.
So it appears that the bond market is signalling no interest rate hike is coming which to me makes the most sense. The market itself has struggled to break the trading range since February and briefly broke below support on Thursday before showing a strong recovery but I would not want to be the canary in the stock market's coal mine or the sword carrying Federal Reserve as once they raise rates the rest of the world will relish the chance to devalue further killing off the only economy in the world showing any form of strength.
https://www.youtube.com/watch?v=7YyBtMxZgQs
So while the market tries to blow off the Chinese devaluation of the yuan (twice in two days) it is clear that the Federal Reserve is bringing its sword to the gun fight that is currency devaluation. Already this year the dollar has surged against a basket of currencies (see graph below) but apparently the Chinese economy, the second largest in the world, needs more help to try to resume its growth. (This is a five year graph with 2015 in the last block of the graph.)
This dollar surge is hurting the large companies that represent the S&P 500 for the simple reason that the price of US goods and services when priced in dollars is becoming more expensive throughout the globe. Already we are seeing companies from Apple to Tesla complain of the negative effects of the dollar rise and all are ratcheting their growth projections down. Behind this slowdown are the announcements of large scale layoffs but according to the Wall Street Journal this morning more than 80% of economists expect the Federal Reserve to raise interest rates in September.
Now while I do not expect them to raise rates they might just to show the world how tough they are but that would be akin to the sword wielder in the clip above. Raising rates would fuel a further expansion in the value of the dollar and would hurt an already slowing economy even further. Not only would it hurt what is left of economic sales growth outside of the US but it would hurt internal growth as well as a rate increase would feed negatively into housing and investment.
It is interesting then that in light of this and the impending interest rate raise that the bond market is gaining momentum to the upside lowering the yield on the ten year note to levels not seen in months.
So it appears that the bond market is signalling no interest rate hike is coming which to me makes the most sense. The market itself has struggled to break the trading range since February and briefly broke below support on Thursday before showing a strong recovery but I would not want to be the canary in the stock market's coal mine or the sword carrying Federal Reserve as once they raise rates the rest of the world will relish the chance to devalue further killing off the only economy in the world showing any form of strength.
Friday, August 7, 2015
The Resurrection of Houdini
"My professional life has been a constant record of disillusion, and many things that seem wonderful to most men are the every day commonplaces of my business." - Harry Houdini
Harry Houdini as most of you I am sure are aware, was one of the greatest magicians ever to live. His feats astonished many but as the quote above shows, he used commonplace ideas and props to achieve the marvelous. As a great magician one of his greatest mysteries is how he died but it appears that he has managed to resurrect himself in the form of a central banker or an analyst or someone with great power in the financial sector as apparently there will be a miraculous global economic recovery later this year. Not only this but the Federal Reserve will be so amazed by this recovery that they will press the raise interest rate button and we will gracefully grow into the future with not so much as a ripple to disturb the peace.
This is certainly what the market is pricing but I have to say that there is a mild form of despair lingering in the air particularly after this week once again saw the markets falling back into the trading range that has been intact since the beginning of February. Since May the market has tried three times to break to new highs but each time it has been beaten back and this week's attempt was feeble to say the least. It may be that the market is waiting for the Federal Reserve to raise interest rates or for some signs of economic strength however the numbers and data points are showing anything but strength.
While the payroll report today showed continued strength I expect this number to be revised lower and certainly to weaken later in the year particularly when you factor in all layoffs announced during the recent earnings season. Outside of this small show of strength the economy is slowing down rapidly. The main reason that analysts point to an interest rate hike in September is due to the supposed labor market strength and a recovery in the second half of the year. To me neither is happening but everyone else seems to believe that it is mainly due to the smoke and mirror dance being talked up by the central bankers of the world.
Take retail sales growth for example, these are nearing contraction levels and have been falling since mid-2011. Automobile sales, one of the bright points in the economy, has been growing due to low interest loans and discounts. This is normally a sign of future weakness as stuffing the channel today results in weak sales later. In fact if you strip out automobile growth United States GDP year over year growth is zero. China is slowing at an alarming rate dragging down all the commodity rich countries with it and Europe along with Japan are still a basket cases; BUT, magically in the second half of this year the US will lurch forth with a spate of growth and rescue the world once again. Not only that but it will shoulder an interest rate hike to boot!
Yes, Houdini has definitely returned but this time when the slight of hand is revealed it may be too late to stop the Federal Reserve pressing the interest rate button and the world economy will already be in a state of shambles.
Harry Houdini as most of you I am sure are aware, was one of the greatest magicians ever to live. His feats astonished many but as the quote above shows, he used commonplace ideas and props to achieve the marvelous. As a great magician one of his greatest mysteries is how he died but it appears that he has managed to resurrect himself in the form of a central banker or an analyst or someone with great power in the financial sector as apparently there will be a miraculous global economic recovery later this year. Not only this but the Federal Reserve will be so amazed by this recovery that they will press the raise interest rate button and we will gracefully grow into the future with not so much as a ripple to disturb the peace.
This is certainly what the market is pricing but I have to say that there is a mild form of despair lingering in the air particularly after this week once again saw the markets falling back into the trading range that has been intact since the beginning of February. Since May the market has tried three times to break to new highs but each time it has been beaten back and this week's attempt was feeble to say the least. It may be that the market is waiting for the Federal Reserve to raise interest rates or for some signs of economic strength however the numbers and data points are showing anything but strength.
While the payroll report today showed continued strength I expect this number to be revised lower and certainly to weaken later in the year particularly when you factor in all layoffs announced during the recent earnings season. Outside of this small show of strength the economy is slowing down rapidly. The main reason that analysts point to an interest rate hike in September is due to the supposed labor market strength and a recovery in the second half of the year. To me neither is happening but everyone else seems to believe that it is mainly due to the smoke and mirror dance being talked up by the central bankers of the world.
Take retail sales growth for example, these are nearing contraction levels and have been falling since mid-2011. Automobile sales, one of the bright points in the economy, has been growing due to low interest loans and discounts. This is normally a sign of future weakness as stuffing the channel today results in weak sales later. In fact if you strip out automobile growth United States GDP year over year growth is zero. China is slowing at an alarming rate dragging down all the commodity rich countries with it and Europe along with Japan are still a basket cases; BUT, magically in the second half of this year the US will lurch forth with a spate of growth and rescue the world once again. Not only that but it will shoulder an interest rate hike to boot!
Yes, Houdini has definitely returned but this time when the slight of hand is revealed it may be too late to stop the Federal Reserve pressing the interest rate button and the world economy will already be in a state of shambles.
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