This year is shaping up to look a lot like last year — we had a 10% rally which was wiped out and followed by a 10% YTD loss… I think the same could happen and people will start panicking before too long. That said, we recognize that today’s gap down will likely be filled at some point so we took off some shorts and replaced them with put options. This way we can still participate in the down move but are risking just our profits from the trade on the short side.
While the market is decidedly below the 50 day moving averages, I always expect gaps to be filled eventually. In other words, expect a bounce back to retest the 50 day and close the gap followed by more selling. I think the down trend is here for the summer and I expect a repeat of last summer’s pain… Hate being right about the wrong stuff, but from a fundamental as well as technical standpoint, this rally seems to be over.
In my view it’s time to sell before May and go away! Europe is falling apart, equities are overvalued, stocks are technically overbought, the tape is starting to point toward negative momentum, and election year gridlock means that stocks may tank hard as they did during the last election cycle.
In other words, be carefull out there… I have had to devote far more time into “battening down the hatches” here at HP and apologize. For most traders, this could be the perfect time to take a net short bet against stocks!
The time is here to lock in gains and hedge your portfolio risks. Even though this rally could still have a few percentage points left to run, we think the time is right to take much of your equity long exposure off of the table and to wait for a meaningful correction in equities. While “timing” the market is difficult, valuing the market based on CAPE or the Shiller PE ratio makes a good deal of sense. Right now, profit margins are higher than they have been in thirty years and profit margins are generally mean reverting. Granted, the rise of the internet has become a source of higher margin revenue for companies but the general theory of mean reversion when it relates to profit margins is pretty sound.
All in all, only the most risk hungry speculator should own stocks here unhedged after a 15% or so rise in the Nasdaq 100 so far this year. We think that the market is poised to repeat last year’s timultuos summer of discontent and are looking to short some things here including but not limited to Salesforce.com (CRM), QQQ, Amazon.com (AMZN), LinkedIn (LNKD), Dunkin (DNKN), IWM, MDY, etc…
On the long ledger, consider holding GOOG calls as a hedge against your other internet stocks as well as Dow calls for a “long hedge” against your net short position or fully hedged position in stocks. While it is okay to own some stocks forever, we think that the stock market is at least 35% overvalued at current prices and that it is certainly time to sell stocks hand over fist.
Buy low and sell high is the fundamental tenet of becoming a good stock market investor. Right now the market is too high for us to be anything besides extremely cautious when it comes to equities. That said, some investors with a long term view should simply add on the way down or remain invested in dividend paying stocks. Warren Buffett now gets his original investment in Coca Cola back every single year thanks to KO dividends.
Looks like that old quote from Gann may be true this time as futures are pointing up around .3% on the QQQ. While I think we have a lot further to fall, I also have to look at the behavior of traders in the past and accept that the future could look somewhat similar.
The damage to the chart is ongoing, and I think this rally will be one to sell or short into tomorrow.
All in all, stocks look vulnerable on valuation concerns, macro economic risks, housing related shocks, banking and finance related pressures, and sovereign debt and currency devaluation.
All of the headwinds that were around last summer are just as prevalent today. While we debase our currency to prop up markets, the picture beneath the surface is not as pallatable to the long side of the tape.
1. The market is up 30% or so from the August 2011 lows — bulls make money, bears make money, pigs get slaughtered.
2. Europe is nowhere near “fixed” yet market participants are buying like it’s 1999 again.
3. The Shiller or CAPE is well above historic norms.
4. The rally we have seen has been on light/non-existent volume.
5. Everyone is bullish.
Reasons to be Bullish:
1. Everyone else is bullish… The self-reinforcing trend may push stocks much higher.
2. Corporate earnings are at all time highs as are corporate profit margins.
3. Even the perma-bears are getting bullish (rhymes with Houdini)
4. Over the long term, stocks go up…
5. Over the long term the dollar loses purchasing power…
All in all, we remain short term bearish and long term bullish on US equities at Hedgephone.com
The USD has traditionally traded inverse to US stocks. After today’s large move higher, we have decidedly broken out of the downtrend written about in last night’s chart study… It is time to be very cautious in equities regardless of 2nd quarter earnings…
Staying short equities with tight stop loss order seems to be a viable and optimal strategy to me… Investors want to focus in on the USD using www.barchart.com to see where the currency market is heading before looking at the stock market….
What is clear to me is that the problems in Europe are worse than we imagined and that this will lead to lower earnings for US multinational stocks… Undervalued companies which are domestic focused should do well even in a bear market for the Euro and for US equities…
Hedgephone’s short signal is now up nearly 3% on the SPY, QQQ, and IWM… We are bearish here, but would set a buy to cover stop order at around .6% higher than we are currently, that way you have locked in a profit….
Always trade with stops on the short side and also try to buy undervalued equities for your long book… following the currency market for equities appears to be the best way to “trade” the market at present.