After peaking last fall at multi-year highs, NYSE short interest has collapsed to multi-year lows. The only time it has been this low over the past coupla yrs was, yep, the deja vu period last spring.
You can see from the chart that low short interest is not a good predictor of near term trend reversals. But it is a data point in support that this rally is in its late stage and that there's a fade trade on the horizon.
position in SPX
Showing posts with label time horizon. Show all posts
Showing posts with label time horizon. Show all posts
Sunday, February 12, 2012
Thursday, February 2, 2012
Bullish Patterns
Am noticing lots of cup-and-handle patterns in many large cap equity charts. Some of the patterns span a few days while others are multi-month in nature.
Moreover, the action 'feels' bullish. The tape is consistently bid. Weakness is being bought regardless of news.
Feels too risky to be net short here. As such, I've been adding some long side exposure to balance things out. I've been buying some of my fave blue chip names (CSCO, JNJ, PG). Today I added a little commodity exposure via DBC.
To be clear, I'm in 'rent' rather than 'own' mode here. But I want to reposition my near term stance in this bullish tape. I'm now a coupla percent net long.
position in CSCO, DBC, JNJ, PG, SH
Moreover, the action 'feels' bullish. The tape is consistently bid. Weakness is being bought regardless of news.
Feels too risky to be net short here. As such, I've been adding some long side exposure to balance things out. I've been buying some of my fave blue chip names (CSCO, JNJ, PG). Today I added a little commodity exposure via DBC.
To be clear, I'm in 'rent' rather than 'own' mode here. But I want to reposition my near term stance in this bullish tape. I'm now a coupla percent net long.
position in CSCO, DBC, JNJ, PG, SH
Saturday, December 31, 2011
Leveraged ETFs
Decent demo of the slippage or tracking error that occurs when holding leveraged ETFs over time. While these vehicles may be useful for trading, the tracking error erodes long term returns, making them undesirable for investors with long time horizons.
no positions
no positions
Friday, October 14, 2011
Minding the Gap
Bought some DBC early last week when prices were falling into the abyss. My thought was that if markets reversed higher, then this might be good for a trade up to about $28.
Why $28? Because once prices broke below that level last month, $28 defines a formidable resistance level. In the context of technical analysis, resistance defines a price level likely to retard further price advances due to the presence of latent supply--such as all those people who bought around $28 early last month and are now trying to get out at a price that lets them come close to break even. Short sellers may also lean on this level and sell come shares short with tight defined risk (i.e., if prices go north of $28, then shorts consider that as an indicator that this was a bad trade, and subsequently stop themselves out).
Moreover, gaps similar to the one that reflected the price breakdown in mid Sept often serve as magnets if/when prices retrace. Indeed, there's a saying among technicians that 'all gaps are meant to be filled.'
To add one more tidbit of rationale to my DBC sale, short term stochastics (e.g., the MACD shown above) were looking pretty toppy, suggesting an 'overbought' condition in the near term. Markets tend to ebb and flow between optimism and pessimism on multiple time frames; presently we may be approaching an excess of optimism in the near term.
As such, when DBC lifted into the gap area today, it was time for me to go.
no positions
Why $28? Because once prices broke below that level last month, $28 defines a formidable resistance level. In the context of technical analysis, resistance defines a price level likely to retard further price advances due to the presence of latent supply--such as all those people who bought around $28 early last month and are now trying to get out at a price that lets them come close to break even. Short sellers may also lean on this level and sell come shares short with tight defined risk (i.e., if prices go north of $28, then shorts consider that as an indicator that this was a bad trade, and subsequently stop themselves out).
Moreover, gaps similar to the one that reflected the price breakdown in mid Sept often serve as magnets if/when prices retrace. Indeed, there's a saying among technicians that 'all gaps are meant to be filled.'
To add one more tidbit of rationale to my DBC sale, short term stochastics (e.g., the MACD shown above) were looking pretty toppy, suggesting an 'overbought' condition in the near term. Markets tend to ebb and flow between optimism and pessimism on multiple time frames; presently we may be approaching an excess of optimism in the near term.
As such, when DBC lifted into the gap area today, it was time for me to go.
no positions
Monday, August 15, 2011
Segmenting Financial Markets
Marketing managers learn early about the value of segmenting their markets. Segmenting involves identifying categories of buyers so that markets can be better understood.
I've often wondered why investment managers don't make a habit of segmenting. In his letter last week, John Hussman takes a shot at it. Dr J proposes four categories of investors and their influence on supply and demand in the current market dynamic.
Fundamentally oriented long term investors are value conscious investors with time horizons of a decade or more. They prefer to buy stocks when valuations are at secular lows. At secular bear market troughs, P/Es have historically fallen to the 4-6 range and dividend yields rise to 5-6% or higher. While stock prices are off 10% from their highs, aggregate valuations are still far from the levels that suggest deep value. As such, fundamentally oriented long term investors are not likely to be a major source of buying demand at current levels since prices do not yet look intriguing to this group. If markets continue to fall, then this group is likely to scale bids as prices suggest compelling value.
Fundamentally oriented short term investors are value-conscious, but in what Hussman calls in an 'erroneous and myopic' way. This group often takes cues from forward P/E multiples which often provide deceptive signals of value. Forward multiples tend to be overly optimistic and cause this group to buy much higher than the long term group discussed above. They are likely to see recent price declines from last month's highs as a buying opportunity. Thus, this group surely constitutes one source of demand currently.
Technically oriented long term investors look at long term chart patterns and other technical indicators to assess secular bullish and bearish trends. Currently, this group is undoubtedly quite concerned over multi-year breakdowns in index and individual stock uptrends. In fact, as prices broke through major support levels, this group was more likely to be a source of supply as sell stops were elected below these support levels. Currently this group is trying to assess direction of the next multi-year trend. After the major damage that has occured in many technical indicators, technically oriented long term investors may be prone to see the next multi-year trend as being lower. Thus, this group may be a persistent source of supply from these levels.
Technically oriented short term investors are also chart watchers, but their time horizon is measured in hours, days, or weeks rather than in years. After the meltdown in prices over the past week or so, many in this group saw markets as oversold in the near term and due for a bounce. This group has likely been a major source of demand over the past few sessions.
I find this a useful framework for determining who may be on either side of the trade currently.
Which of the four 'buckets' do I fall into? Well, under this scheme I participate in multiple categories. While I my strength and interest is primarily as a fundamentally oriented long term investor, there has been little for there to do from the long side. As such, I have been attracted to shorter term fundamental and technical opportunities. For example, I was buying them in the hole last week into what appeared to be an oversold market in the near term (technically oriented short term investor category).
Of course, that source of demand has already become a source of supply as I have been piecing out inventory as prices have moved higher...
Personally, I'm trying to once again elongate my horizon as the short term space seems pretty crowded.
position in SPX
I've often wondered why investment managers don't make a habit of segmenting. In his letter last week, John Hussman takes a shot at it. Dr J proposes four categories of investors and their influence on supply and demand in the current market dynamic.
Fundamentally oriented long term investors are value conscious investors with time horizons of a decade or more. They prefer to buy stocks when valuations are at secular lows. At secular bear market troughs, P/Es have historically fallen to the 4-6 range and dividend yields rise to 5-6% or higher. While stock prices are off 10% from their highs, aggregate valuations are still far from the levels that suggest deep value. As such, fundamentally oriented long term investors are not likely to be a major source of buying demand at current levels since prices do not yet look intriguing to this group. If markets continue to fall, then this group is likely to scale bids as prices suggest compelling value.
Fundamentally oriented short term investors are value-conscious, but in what Hussman calls in an 'erroneous and myopic' way. This group often takes cues from forward P/E multiples which often provide deceptive signals of value. Forward multiples tend to be overly optimistic and cause this group to buy much higher than the long term group discussed above. They are likely to see recent price declines from last month's highs as a buying opportunity. Thus, this group surely constitutes one source of demand currently.
Technically oriented long term investors look at long term chart patterns and other technical indicators to assess secular bullish and bearish trends. Currently, this group is undoubtedly quite concerned over multi-year breakdowns in index and individual stock uptrends. In fact, as prices broke through major support levels, this group was more likely to be a source of supply as sell stops were elected below these support levels. Currently this group is trying to assess direction of the next multi-year trend. After the major damage that has occured in many technical indicators, technically oriented long term investors may be prone to see the next multi-year trend as being lower. Thus, this group may be a persistent source of supply from these levels.
Technically oriented short term investors are also chart watchers, but their time horizon is measured in hours, days, or weeks rather than in years. After the meltdown in prices over the past week or so, many in this group saw markets as oversold in the near term and due for a bounce. This group has likely been a major source of demand over the past few sessions.
I find this a useful framework for determining who may be on either side of the trade currently.
Which of the four 'buckets' do I fall into? Well, under this scheme I participate in multiple categories. While I my strength and interest is primarily as a fundamentally oriented long term investor, there has been little for there to do from the long side. As such, I have been attracted to shorter term fundamental and technical opportunities. For example, I was buying them in the hole last week into what appeared to be an oversold market in the near term (technically oriented short term investor category).
Of course, that source of demand has already become a source of supply as I have been piecing out inventory as prices have moved higher...
Personally, I'm trying to once again elongate my horizon as the short term space seems pretty crowded.
position in SPX
Tuesday, June 14, 2011
The Sentiment Cycle
Anyone looking at a chart of stock prices can see that markets move in ebb-and-flow cycle patterns. In fractal-like fashion, cyclical patterns reveals themselves across various time frames--from granular minute-to-minute action to secular decade-long swings.
The nascent field of socionomics equates cycles with changes in 'social mood'--alternating periods of collective optimism and pessimism that cause investors to run with the pack (a.k.a. 'herd behavior').
Here is an interesting diagram that reflects various emotional states as a market cycle progresses. Note that extreme optimism is associated high risk. This is because euphoria has driven investors to bid up prices. At some point, extreme optimism reverses as do prices.
This model suggests that best value is obtained at lows in the sentimental cycle. Extreme pessimism drives investors to sell and to stay away from assets marked way down.
I personally find it useful to overlay these concepts on my fundamental analyses. For example, a question that I've been asking myself over the past couple of weeks is where on the diagram is general stock market sentiment currently?
We entered a bullish uptrend off the March 2009 lows. Since then, markets have been rising on increasing optimism. This has been a strong bull run, with major indexes like the S&P 500 (SPX) up nearly 100% off the lows. Now, however, the uptrend is more than 24 months old and general market valuations are extremely rich. Technically, we're approaching a level (SPX 1250) which, if decisively pierced, would reflect a trend change.
From where I sit, collective sentiment may have topped out at 'Euphoria' at the end of April (approx SPX 1370). Investors are currently at 'Anxiety' after a 7% decline from the highs. If correct, then we have more work to do on the downside. Stages of fear, panic, capitulation (e.g., 'forced selling') lie somewhere ahead. I have been trying to position accordlingly.
I'm not totally pessimistic, however, as some individual names have been beaten down to the point where the negative sentiment coupled with interesting fundamentals suggests value. Cisco Systems (CSCO) is one of those names.
Over the past few months, CSCO has reversed nearly all of its gains off the 2009 lows as recent quarters have fallen short of expectations. Sentiment in this name is horrid, and portfolio managers have been busy unwinding positions in CSCO as prices go down.
Our diagram, of course, suggests that extremely negative sentiment is likely to wring risk out of a security. Pessimism encourages selling over buying. All else equal, the lower the price of a security, the better the value.
I happen to believe that CSCO's competitive advantage is still intact and durable. Using similar reasoning to my entry into this name, I now think I can buy a large multinational company with a durable franchise, strong balance sheet, and $9 billion in free cash flow, that I conservatively value at $90 billion, for a market price of about $60 billion.
The risk, of course, is that the fundamentals of the company have been permanently impaired, and markets are in the process of revaluing the franchise.
Could be, but the current disparity (market says it's worth $60 billion; I think it's worth $90 billion), gives me a decent margin for error in my assessment.
position in CSCO, SPX
The nascent field of socionomics equates cycles with changes in 'social mood'--alternating periods of collective optimism and pessimism that cause investors to run with the pack (a.k.a. 'herd behavior').
Here is an interesting diagram that reflects various emotional states as a market cycle progresses. Note that extreme optimism is associated high risk. This is because euphoria has driven investors to bid up prices. At some point, extreme optimism reverses as do prices.
This model suggests that best value is obtained at lows in the sentimental cycle. Extreme pessimism drives investors to sell and to stay away from assets marked way down.
I personally find it useful to overlay these concepts on my fundamental analyses. For example, a question that I've been asking myself over the past couple of weeks is where on the diagram is general stock market sentiment currently?
We entered a bullish uptrend off the March 2009 lows. Since then, markets have been rising on increasing optimism. This has been a strong bull run, with major indexes like the S&P 500 (SPX) up nearly 100% off the lows. Now, however, the uptrend is more than 24 months old and general market valuations are extremely rich. Technically, we're approaching a level (SPX 1250) which, if decisively pierced, would reflect a trend change.
From where I sit, collective sentiment may have topped out at 'Euphoria' at the end of April (approx SPX 1370). Investors are currently at 'Anxiety' after a 7% decline from the highs. If correct, then we have more work to do on the downside. Stages of fear, panic, capitulation (e.g., 'forced selling') lie somewhere ahead. I have been trying to position accordlingly.
I'm not totally pessimistic, however, as some individual names have been beaten down to the point where the negative sentiment coupled with interesting fundamentals suggests value. Cisco Systems (CSCO) is one of those names.
Over the past few months, CSCO has reversed nearly all of its gains off the 2009 lows as recent quarters have fallen short of expectations. Sentiment in this name is horrid, and portfolio managers have been busy unwinding positions in CSCO as prices go down.
Our diagram, of course, suggests that extremely negative sentiment is likely to wring risk out of a security. Pessimism encourages selling over buying. All else equal, the lower the price of a security, the better the value.
I happen to believe that CSCO's competitive advantage is still intact and durable. Using similar reasoning to my entry into this name, I now think I can buy a large multinational company with a durable franchise, strong balance sheet, and $9 billion in free cash flow, that I conservatively value at $90 billion, for a market price of about $60 billion.
The risk, of course, is that the fundamentals of the company have been permanently impaired, and markets are in the process of revaluing the franchise.
Could be, but the current disparity (market says it's worth $60 billion; I think it's worth $90 billion), gives me a decent margin for error in my assessment.
position in CSCO, SPX
Monday, June 6, 2011
SPX 1250
A few days back we wondered whether the major indexes might not have a date with the uptrend line off the Spring 2009 lows. For the S&P 500 (SPX), that uptrend line marks at about 1250 currently.
Since then, markets have continued to trade heavy, putting that 1250 level all the more in play.
Shorter term technical analysis provides more suggestive evidence. Multi-month horizontal support highlighted by the lows last March and the 200 day moving average intersect at ~1250.
While many short term indicators suggest an oversold tape, 1250 may be pulling on prices like a magnet.
position in SPX
Since then, markets have continued to trade heavy, putting that 1250 level all the more in play.
Shorter term technical analysis provides more suggestive evidence. Multi-month horizontal support highlighted by the lows last March and the 200 day moving average intersect at ~1250.
While many short term indicators suggest an oversold tape, 1250 may be pulling on prices like a magnet.
position in SPX
Wednesday, May 25, 2011
SLV Trade Closed
Exited my three week old SLV trade on today's strength. A couple of adds to the position as the security leveled out in the 32-35 range helped this trade along.
Perhaps SLV will continue higher on a quest to fill the gap at 38ish. This level also coincides w/ the 50 day moving avg.
But my time horizon on this trade was shorter term, and I was fortunate to be able to sell into strength today.
While the volatility has declined somewhat, this was still one one of the jumpier positions that I've held in a while. Hard to imagine folks trading this thing w/ leverage.
no positions
Perhaps SLV will continue higher on a quest to fill the gap at 38ish. This level also coincides w/ the 50 day moving avg.
But my time horizon on this trade was shorter term, and I was fortunate to be able to sell into strength today.
While the volatility has declined somewhat, this was still one one of the jumpier positions that I've held in a while. Hard to imagine folks trading this thing w/ leverage.
no positions
Tuesday, April 5, 2011
AAPL Losing Some Weight
Apple's (AAPL) weighting in the Nasdaq 100 Index (NDX) will be cut significantly on May 2. Currently 20% of the index, AAPL's weighting will fall to about 12%.
The weightings of Microsoft (MSFT) and Oracle (ORCL) will double as part of the adjustment.
The move is being done to rebalance the stock weightings to better reflect underlying market capitalizations. Currently in the NDX, AAPL's weighting is 6x higher than MSFT even though AAPL's market cap is only 46% higher currently.
Because there are index products based on the NDX such as the Powershares QQQ Trust (QQQQ), the shift will likely put near term selling pressure on AAPL and a bid underneath those stocks whose weighting will significantly increase.
position in MSFT
The weightings of Microsoft (MSFT) and Oracle (ORCL) will double as part of the adjustment.
The move is being done to rebalance the stock weightings to better reflect underlying market capitalizations. Currently in the NDX, AAPL's weighting is 6x higher than MSFT even though AAPL's market cap is only 46% higher currently.
Because there are index products based on the NDX such as the Powershares QQQ Trust (QQQQ), the shift will likely put near term selling pressure on AAPL and a bid underneath those stocks whose weighting will significantly increase.
position in MSFT
Wednesday, March 2, 2011
Trading Crude Oil
FYI, sold a chunk of crude exposure into this morning's spike higher.
Could oil move higher from here? If unrest continues to heat up in the Middle East, the answer is most definitely yes. On the other hand, if peace suddenly breaks out, then crude will likely take a sizeable hit.
If oil does march higher from here, I have some 'secondary' exposure in the form of DBE and RJI that I have 'tagged' w/ longer horizon intentions.
Meanwhile, seemed prudent to reel in a portion of this trade after a gappy 10% move in crude.
position in DBE, RJI
Could oil move higher from here? If unrest continues to heat up in the Middle East, the answer is most definitely yes. On the other hand, if peace suddenly breaks out, then crude will likely take a sizeable hit.
If oil does march higher from here, I have some 'secondary' exposure in the form of DBE and RJI that I have 'tagged' w/ longer horizon intentions.
Meanwhile, seemed prudent to reel in a portion of this trade after a gappy 10% move in crude.
position in DBE, RJI
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