Tuesday, January 24th, 2012 @ 4:00pm
The end of January is upon us. This is usually the time that “investors” come out of their New Years haze of pushing whatever capital they have into the marketplace. You see, every year, just around the holiday season, money managers become entranced in the hypnotic dance of “Portfolio Adjustment” and “Window Dressing”. It is the theory of selling your losers and adding to your winners and that makes most look just a little bit better around bonus time.
But when January rolls around, just the opposite occurs; the crap that was beaten down, jettisoned and otherwise regurgitated become the object of love and affection. That is the heart of the January Effect. It used to apply just to small cap stocks. Then it became famous for the Dogs of the Dow. This year it is meaningful to the worst performers from last year from any sector. And the results are very pronounced.
But aside from the “Amok Time” for money managers, I’m amazed to see my lone prediction of 2011 come to full fruition. You see, my prediction was that 2011 would look very much like 2010 in terms of the Calendar. And exactly like in 2010, 2011 had a 20%+ gain starting in the beginning of October and the quarter and extending into the first quarter of the New Year.
Like clockwork, over the past several years since the 2008 crash, this time of the year brings about a raucous markup of highly liquid financial-related assets. And like clockwork, during this same time-frame, the estimated prices of homes drops between 6-12%. Last year, in 2011, we were square in the middle of a fabulous QE stimulus where seven billion dollars a day was funnelled into the closed loop of the financial system in order to aid prices. This year, in 2012, we have Operation Twist which was not nearly as strong as last years stimulus. But the rally was birthed around the world simultaneously and on the day of the technical breakdown, October 4, and it has not stopped as of this date. Yet, most everyone looks at the markets with a glazed eye of doubt.
This goes back to our “training” as “investors”. The playbook is the same. Bad news means more stimulus and free money. Good news may mean that all the free money is working. But deep in their hearts, everyone knows whats really going on. But we all play along just the same and will continue to do so until either a “new beginning” or “the end”.
Technically we are overbought by every measure. But that is not enough to turn the advance into a reversal. We are simply in the “Pause the Refreshes” and not pulling back much. SPX 1300 for 2012 is as SPX 1200 was for 2011. And everyone is waiting for more stimulus in this, an election year.
The first pullback will test the breakout near SPX 1260. Then we shall see whether this pretty uptrend is just another trap in an extended trading range, or something else.
Wednesday, January 18th, 2012 @ 3:28pm
As you undoubtedly know, the equity market has rallied in an uninterrupted fashion since December 20, 2011, for about 20 trading days. The uptrend is textbook and picture perfect without the wild swings experienced in months past.
Certainly the news is not great and headline risks remain almost every day. Volume is running 30% lower than this time last year. Commodity prices are rocketing higher without commensurate demand. Mostly everything that had been wrong with the fundamentals in the recent past remain wrong today, albeit with signs of “stabilization”.
So, why does the market rise almost every day?
Since we agreed to the latest trillion dollar ponzi scheme that fixes Europe, yields have plunged for everything. The answer is that there is simply no yield. Never mind currencies and other inter-market relationships. The only thing that matters is that there is no yield. Plus one other thing: China.
Between the plunge in Euro-yields and China back to stimulating a slowing economy, equities and commodities have nowhere to go but up. There are no sellers. This is why shorts are busy covering and short interest is at multi-year lows.
Never mind that we are into major techinical resistance. Never mind that many bankers, from the buy side to the sell side, are warning about the current economic situation. There is simply nowhere to put all that money sitting in the closed ZIRP loop.
This unbearably enjoyable phase ends with a big volume, blow-off spike higher or the weight of dissapointments and downgrades. There may be near record low quantified bearishness but many are on the sidelines and out of the game so the majority can actually be ”right”.
Friday, January 13th, 2012 @ 1:33pm
The downgrade ax will fall later today on France and Austria. But if the U.S. downgrade history is your guide, it should bring a "buy the news" reaction. Maybe not this time as my guess is that virtually all this years chasers of equities will be underwater in a short time.
Spain has borrowed $150 billion in each of the past two months. The $600 billion Euro Bailout Fund is going fast. But the stock market will worry about it when the money runs out. The reality is that expectations are for QE3 before it does and just in time for the elections. QE3 should do wonders for the economy...
Indices are at the top of the range and many technical indicators have gotten technical types long over the past few days. Remember, we have rallied in an uninteruppted fashion through the holiday and since the ECB Bailout fund became a reality on December 20, 2011.
Volume remains insanely low. Spikes continue to be pre-market. And the short squeezes have been everywhere. Interestingly, short squeezes happen at the beginning of a rally phase or the end of a rally phase. Which one do you think we're in?
Have a great long weekend!
Monday, January 9th, 2012 @ 12:47pm
It is exactly three weeks since the rather tardy Santa rally commenced. After tagging SPX 1205, the Mystical Holiday Forces jumped the morning futures up 35 points and the end of the year rally was quickly born. Today feels fitting as it is just about run its course after gaining a full 75 SPX points, 600 Dow points and 150 Nasdaq points.
Most of the attention has been focused on yesterday’s heroes; mega-cap cash flow consumer and technology companies. Plus Apple, which has added 12% or approximately $40 billion in market value during this time and is now testing its yearly highs.
There is more shitty news out of Europe, but nobody cares any more because they have plenty of cash to avoid any crisis, thanks to the stealth QE through Swap Lines. If you don’t think we bailed them out, please simply notice that there is no more market scares regardless of news or headlines. Case closed, for now
The one fascinating feature of the equity market this year has been the “holiday volume”. One of my predictions is that average daily volume on the NYSE will be 600-700m shares per day, half of what it was last year. There remains very little true liquidity and so both individual stock and index velocity will remain high.
With the individual investor out of the markets other than for “safe” bonds and their yearly 401k contributions, markets will swing on a dime. With Europe “safe” for now and the election this year, most “investors” fully expect some type of monster stimulus to be coming shortly. And most of the current environment’s sellers have already sold and are focused on January Effect bounces in momentum stocks and of course Apple. Little matters past that as most continue to be lulled by the resilience of the indices. Time to start paying attention!
Wednesday, January 4th, 2012 @ 12:41pm
Welcome to 2012. We are now in the Academic-worthy fiscal and economic policy of “Extend and Pretend” and it is still nowhere near over. When it is finally all said and done, it will be the template for business students around the world, for decades to come.
Since March of 2009, some 34 months ago, the government “came to the rescue” of the frozen financial system and major banks by changing the banking rules and choosing to take the risk that the markets refused to take. Hence the saying “private gains and public losses. The Capital Markets responded as expected, recovering almost all the losses from the now-defunct Securitization and Housing Boom. The money went to Money Heaven yet was replaced by newly minted digital cash created out of thin air. Never in history has such a thing been done but that is what the Powers the Be decided must be the case. So by creating trillions of new dollars, our economy can go along its merry way, with most participants oblivious to the reality of the situation.
Lately Europe has been in the same position but without the luxury of the ability to print new money as organically as we here in America, the land of the free and the home of the brave. So they create an “entity” and it somhow gets funded with a quick trillion. Problem solved. But not really.
These unprecedented monetary actions have many anticipating a giant reset of the system; a crash when reality is finally and unmistakably recognized. But so far it has not happened. Funding goes on, markets open and trades get settled (mostly). The newly minted cash goes right where it is directed, the closed loop of banks and investment assets, and it stays there never to escape. With the Fed’s zero percent interest rate policy, the cost of cash is effectively zero for those Primary Dealers who can borrow it. Reminder: nobody can borrow at zero percent but the Primary Dealers, so the big money loop stays closed.
Today the bond king, Bill Gross, publicly stated the truth about the bailouts and stimulus and called it what it really is; A Ponzi scheme. But does the truth matter to the markets? Not one iota. The liquidity of newly minted cash and the calendar preceed the gains and losses that happen in the marketplace. In fact almost nothing of a fundamental nature can move the market. It is simply the next phase of the policy of “Extend & Pretend”, and the marketplace buys it hook, line and sinker. Same as it ever was.
Interestingly, there has been a substantial change in the nuts & bolts of the equity markets, with defensive and dividend issues leading to the upside while materials and commodities wait for the next round of stimulus to begin its next advance. And all the while, the shiniest bauble, Apple, adds billions in market value every day, day after day and week after week. It serves to distract everyones attention from the reality of our situation. Overall market volume continues to drop and roughly 95% of all gains come from the pre-market and a gap up at the open. Some say it is being driven by the “strong domestic economy”. That is a false assertion as any strength is due to the back-ended holiday season and will disappear soon enough. And oil prices? Don’t ask. That is the stuff of another piece.
So, my resolution for the New Year is to suspend my disbelief once again and force myself not to bet that reality will overtake fantasy anytime soon. My greatest investing fear is that one day we will wake up and find that it has.