Use access key #2 to skip to page content.

binve (< 20)

Still Bearish: FA and TA on S&P 500, Observations on the Economy

Recs

155

May 10, 2009 – Comments (73)

Okay, I know this is probably old coming from me, and with the number of Caps Bears talking about an imminent turnaround, why read one more? Why? Because this post has: Fencing, fighting, torture, revenge, giants, monsters, chases, escapes, true love, miracles... …. Okay, so maybe it doesn’t. But it does have some moderately intelligent observations, and the acerbic wit that you have come to love from binv :)

Current Fundamentals

The current fundamentals, how shall I put this, … stink. Not just “excuse me I just ate a salad” stink, but “watch out I just ate a pot of chili that has been sitting out of the fridge for a day” stink. So why did we rally to begin with? Because we were at historically oversold conditions and pessimism was at an all time high. That’s it. Conditions were ripe for a very good bear market rally. Extreme fear cannot exist forever and nothing goes up or down in a straight line. It is just that simple. There are several factors to the economy that stink and make me deeply suspicious of anybody saying that the worst is over. Earnings, Unemployment, Upcoming Alt-A and Option ARM resets, Home Prices, and worst of all: Financials.

Earnings

What a complete and utter joke. Earnings estimates for the S&P 500 for 2009 right now are somewhere between $35 and $45 (discounting the Pollyanna’s and the uber-bearish). There is obviously no consensus here, because estimates are estimates. But lets take an “average” value of $40. Based on the current price of the S&P at ~$925, this gives a P/E of …. 23 …. !!!!!! ARE YOU KIDDING ME!!!! When the S&P got down to 666 and still using earnings of 40, the P/E was 16.7. That is still absolutely nowhere near any real bear market bottoms (which are typically between 6 and 10). We are still even above the average earnings of the S&P which is historically 12-14.

So let me get this straight: P/E goes from about 45 at the peak (complete insanity) down to 17 (still way above average) on some of the worst economic news EVER, and we have a bottom? Seriously?

Go away and come back when we have a P/E of 10, then I will start listening to you.

Unemployment

So many of us have ranted on the BLS unemployment numbers, the games that are played, the revisions, the bogus “birth-death” adjustments, jobless vs. unemployed, etc. etc. However, there is one thing that the BLS can’t hide: trends. Take a look at the unemployment trends from the BLS website (16 and older, seasonally adjusted):



Now I believe the actual unemployment rate is a lot higher, but the BLS reports or “adjusts” them artificially downward. But they always have. The TREND is what is important here. And if you looks at the unemployment rate it is not leveling off, in fact it is just the opposite. The trend is accelerating (i.e. the change in the slope of the curve is a positive number and increasing).

Upcoming Alt-A and Option ARM resets

This video was passed around in Caps back in December when it originally aired. It is a 60-minutes piece (exceptionally informational and well done) on the upcoming Alt-A and Option ARM wave. If you have not watched this, please do so here . Actually, even if you have watched it, watch it again. This is a BIG DEAL.

The jist is, that the second wave of the mortgage meltdown has not yet hit, and we are just at the very beginning of the second wave. Check out the chart at 3:48 of the video above. Now couple this with the unemployment observations I have made above. When these mortgages all reset to higher rates, do you think that the economy will escape from the huge number of default rates, especially from the newly unemployed? Do you have any clue what this will do to consumer spending for people that can now just barely afford their mortgage? Do you honestly believe that we can refinance our way out of this mess (which would just further push the problem out instead of fixing it, despite that fact that this won’t work to begin with).

Home Prices

With rising unemployment, second wave of mortgage defaults coming, and continued back economic data pouring in, does anybody believe the NRA that we have seen the bottom in housing? Not me at least. And if home prices continue to decline (which on average they will) what do you think this will do to consumer spending? That’s right, it is going down. And if consumer spending accounts for the biggest portion of GDP (currently about ~70%), what does that do to GDP? Again you are right, it is going down. The structure of the economy needs to transition from consumer spending to production. That is the only way the economy will truly start growing again. Any attempt to re-inflate home prices / housing bubble will be a huge catastrophe (throwing money down a black hole) at worst and simply push the problem to the right at best.

Financials

In an effort to keep my blood pressure down, I will refrain from going on a tirade about financials. But let me make several observations. Consider the Unemployment, Alt-A and Option ARM resets, and home price issues I outline above. This will hit the economy hard in general, but it will hit the financial sector the hardest. Like I have said on many occasions, the financial sector is the cancer of this economy. Do you think the financial institutions have seen the worst when it comes to write-downs from the mortgage crisis? Not a chance. The recent mark-to-“imagination” rules are 1) a joke but 2) address only the first wave of the subprime meltdown. Wave 2 is coming and is potentially much larger than wave 1. But lets look at a few more reasons why financials are bad investments right now.

1. Financials have no real earnings right now. That’s right. I will invite you to read this article by Thomas Tan: How Much of the Banks’ Earnings are Real? . This is an excellent summary of the falsity of financials purported earnings. This article discusses: current mortgage refinancing, loss write-down postponement, accounting loopholes, etc.

2. Stress Tests were NOT good news. No matter how it was spun, read past the subterfuge. The banks are not adequately capitalized. And the problem is even more dire than test would suggest (as the tests were designed by the same financial institutions and economists that failed to see the current financial / mortgage meltdown). There is so much money tied into these long term CDS that have no (absolutely zero) possibility of ever being worth what was paid, even after the current round of write downs. When the next panic occurs, and it will, we will see a huge round of financial institution bankruptcies. The problem, of course, is maturity transformation.

3. Most of the banks are making huge share offerings at significantly lower prices than current market prices. Whaaaaaa…. ????. Why would that be? (Other than the fact that they are not worth current prices) GMX  and outoffocus  have a great discussion here about this: The Market Is About To Plunge (Day 9, Vol.8)

FA continued

This last one (financials) more than anything causes me to call BS on this rally. This is because financials have been leading the whole charge. Financials stink, they are the cancer of the entire economy. And the “fixes” to financials discussed above are a joke. So when I see XLF or the Philly Banking Index up OVER 100% off the bottom in less than 2 months, I laugh. It is too ridiculous.

Real bottoming will be lead by new industry and manufacturing. We will see lowering unemployment. We will need to see a cleaning out of financials (many bankrupt from accepting the true consequences of bad derivatives / mortgage bets). And what are the chances of this happening in the next year? Almost zero.

This rally is literally just a technical correction. The market on weekly and monthly terms (see below) were so extremely oversold. But this rally is not based on fundamentals. And the move the last 3 weeks looks like gambling euphoria: Worst is over! Bottom is in! Buy before its too late! …. ????? Seriously? No sir, I’m not buying it. Euphoric sugar highs from eating too much cotton candy (what the so-called “fundamentals” the bulls are pointing to right now) lead to really nasty and cranky crashes later on.

However I do foresee a stronger rally within the next year based on increasing fundamentals, but ultimately just a larger bear market rally. What I think needs to (and will) happen now is a pullback to shake out the unhealthy (weak-handed) bulls. I think this will set the stage for a much longer and stronger rally. Ultimately my belief is that the next rally after the pullback for the next 1-2 months is just another bear market rally. However I think the fundamentals will (slightly) improve for a time. And I think the rally will be (slightly) more fundamentally and technically sound, or more specifically: the fundamentals won’t stink quite as bad as they do right now. But at the end of the day it is just another bear market rally.

.... continued in the Comments section ....

73 Comments – Post Your Own

#1) On May 10, 2009 at 11:00 PM, binve (< 20) wrote:

Until we see financials truly cleaned up, a true recognition of the derivatives mess on the banks balance sheets, the beginnings of a  return to a manufacturing / producer economy, and broad market P/E’s that a closer to true bottoms (between 6 and 10), then we are not at the bottom. Any rally between now and then is simply another bear market rally in my opinion.

Fundamental Analysis Summary

- Rally since the bottom is a technical rally off oversold conditions
- Fundamentals have not improved since the beginning of the bear market
- Financials have been leading this rally and since financials are the cancer of the economy (until they are DRASTICALLY overhauled / not just the window-dressing policies that have been talked about so far) any rally led by financials is doomed to failure
- Bullish sentiment right now is far too high with no fundamental reason. This is smells exactly like gambling euphoria to me, such as when you have a suited Ace-King, but a 6-7-8 of an opposite suit flops out. You keep betting, expecting and Ace or a King to come out on the turn or the river, but odds are that you are just going to be beaten by someone with a straight. The smart money will “fold” soon and wait for a better setup.
- US economy is still led by consumer spending (~70% of GDP). The housing picture is still bleak and will get worse before it gets better. This will negatively affect consumer spending, which will further drag the economy down. This affects financials the most
- A real bottom will form once the economy begins to transition from consumer spending to production. There is no way around this one.

My positions:

I have been bearish on this rally for over a month. So you may read what I have to say and discount it completely, since we have rallied hard since I have been bearish. That is fine. I am not trying to convince anybody to do anything. I am simply sharing my viewpoint. But I did not call a top on the rally before (I am now), I have just got progressively more bearish as the rally proceeded, and here was my investment breakdown as the insanity continued. I have shared this in some form or another in blog posts and comments in others blogs. I have been moderately bearish for awhile. But I did not become super bearish on this rally until very recently.

S&P 700: 50% long (all energy related) / 50% cash
S&P 800: 20% long / 20% short / 60% cash
S&P 825: 40% short / 60% cash
S&P 875: ~100% short

What is described above is my trading account. As I have said in the past, I make a big distinction between my trading account and my investment account. My long term investments continue to be: Long gold (biggest holding is CEF), Long silver, Long GSM, Long oil, long other commodities.

I think the top of this rally occurred at the end of last week (most likely) or will occur this next week.

Current Technicals (short term)

The first thing we want to look at to give us an indication of breadth (participation from different sectors) is at financials and the NASDAQ compared to the S&P. Like I was saying above. Financials have been leading this rally which makes me deeply suspicious. Tech was also a leading frontrunner in the rally. But it is now showing weakness. The NASDAQ has not been making new highs with the S&P, and the S&P is being led by financials the last few days. With new acceleration at the end of a very long and strong rally. This is a strong technical breakdown signal for this rally.



Enlarge

Technicals (Longer term)

As I have been saying above, this rally since March 6 is the product of historically oversold conditions and extreme bearish sentiment. Don’t believe me? Lets look at a 20 year monthly chart



Enlarge

Wow. If that doesn’t open your eyes, I don’t know what will. Nothing goes up or down in a straight line and we were due for a rally. But there is nothing about this chart that says bottom to me. I think we have a lot further to go down.

But now lets see what the weekly chart is telling us



Enlarge

We see the V-shaped bounce off of oversold conditions. Okay, but we now go from oversold to overbought in the matter of 2 months. There is only one condition where moves like this happen: BEAR MARKETS!!!!!

The daily chart show the same picture



Enlarge

Extreme bearishness has been replaced now by extreme bullishness. But the bulls are now squealing and turning into pigs. Well, this bear is ready for some bacon and pork chops.

Elliot Wave Counts and Technical Projections for the Next Few Months / Years

I have been thinking a lot recently about the bear market, the current rally and what the future is likely to hold. And then on Friday, I had a very good conversation with cabot and columbia and we were discussing waves and the larger count. A lot of my recent work has been trying to figure out the count for the rally since March 6. And the price action is lending itself to a lot of different interpretations. So instead of looking at just the price and the possible counts, I have been trying to fit the “wave personalities” to the appropriate counts, combined with my fundamental analysis above, in order to make sense of what is going on. But I am getting ahead of myself. Lets start with the larger picture first.

Long Term Count

This larger count is a departure of the count that I have been carrying. It is gravitating back to GoodVibe’s original count which I have become convinced is the correct one (as opposed to Roy’s). The reason is primarily the price stayed in a large channel from the top of the bull down to 666, and now we have moved outside of it. It is a question of price movement and time scale, and based on the size of the countertrend move now, it just seems intuitive that is a move at a larger degree. So here is my count for the price action since the top of the bull market in 2007:



Enlarge

The Top of Bull in 2007 was the termination of a very large degree count up. This means this market will correct for several years (an large degree corrective phase). The first move down was a very large 1-2-3-4-5. Since corrections are NEVER 5’s, this 1-2-3-4-5 is only PART of the correction. The most likely candidate is a very large zigzag, which will take the form of a 5-3-5. As you can see from my chart, I think the market will bottom around 500. Why do I think this?

First let me say that I and many other have been comparing this bear market to the Crash and Great Depression of 1929-1934. This because of the striking similarities of the technicals and the economic fundamentals of now and then. However I do not think, as the phrase has been coined, that this is “your grandfather’s depression”.

I am not actually forecasting the S&P to go down to 1933 levels. After the initial crash in 1929, the Dow went from 380 down to 200. The great depression led the Dow from 200 down to about 40 (another 80% drop). So to clear I am not suggesting that the S&P go from 666 to 133 (another 80% drop).

The reason is because the inflation gun will be set to fully automatic. Bernanke has stated many times that he will use every tool (chiefly the printing press) to guarantee another 1930s type depression does not occur. So I believe wholeheartedly that this is not the bottom. I think the S&P will go lower, but my estimates are somewhere in the 500s. But how does this fit with my "the bottom occurs at a broad market PE of 6-10" statement? Because earnings will be inflated.

I think once the S&P hits the bottom in prices probably sometime next year, stock prices will go nowhere (very sideways on average) for several years. In the meantime, the economy will be in the process of consolidating for a long time and then eventually repairing itself. But at the same time the Fed and Treasury will be inflating the dollar into oblivion (well, not quite that bad). But inflation will be very high. With stagnant stock prices and then inflated earnings for several years, the market will eventually bottom in term of valuation. Then the market will finally be in an opportunity to rally for real.

What should you invest in between now and then (I am making the distinction here between investments and trades): gold and commodities. Well, I am not telling you what to do, this is simply what I am doing.

Intermediate Count

Now lets delve into the intermediate wave count. This one is more interesting as it affects the more immediate decisions for trading. Like I mentioned above, since the price action lends itself to a lot of different interpretation, I am going to list some observations regarding Elliot Wave rules, observations, and “wave personality” interpretations to try to make sense of what the price is saying

- Wave 3 is usually the longest wave and NEVER the shortest wave
- Wave 2 is typically a zigzag
- Wave 4 is typically a flat
- Waves display corrective alternation (i.e. if Wave 2 is a very simple correction, Wave 4 will be much more drawn out and complex, and vice versa)
- In the stock market, extension typically occurs within Wave 3s
- Wave 1 is part of the “basing” process and is usually heavily corrected by Wave 2
- Wave 2 retraces almost all of Wave 1. Investors are convinced the bear market will continue
- Wave 3 is a wonder to behold. Usually accompanied by: large and fast price movement, lot of volume and breadth
- Wave 4 alternates Wave 2. Move often than not they tend sideways
- Wave 5 is less dynamic than Wave 3 in terms of breadth. They also usually display a slower maximum speed of price change as well
- Wave A is usually considered just another pullback before the next major advance. The public surges to the buy side
- Wave B’s are phonies. Sucker plays, bull traps, speculator’s paradise. They are often unconfirmed.

Okay, with all of that in mind, let me first talk about observations on other charts that I have seen that I do not like and violate the rules / guidelines listed above:

1. Showing a Wave 1 move from March 6 to March 24 and Wave 2 ending April 1. This is unsatisfying because this makes Wave 1 the strongest wave in the rally (which it almost always is not) and Wave 2 retracing Wave 1 by only 15-20%
2. Showing Wave 3 moving from April 1 – April 20. This makes Wave 3 smaller than Wave 1, and it makes the Wave 3 advance much slower it terms of the “speed” of the price change.

I don’t buy these assumptions. So when I look through the price action and reconcile all of these rules and guidelines together I come up with this count:



Enlarge

This count adheres to all of the guidelines and the description of the wave personalities very well. It also fits with the fundamental analysis that I list above. Moreover, the move from April 21 to May 9 (the Wave B move) in my mind is a complete phony. This move up was initiated by a gap up in financials (which is still open on the XLF chart) and lots of irrational bullishness. So based on this count, I believe we are in the middle of the correction.

The projection that you see on the right side of the chart is complete speculation on my part. But if the count that I have is correct, then the correction we are in is setting up to be an expanded flat. And due to the fact that there is such an extreme level of bullishness, I believe this correction will throw a lot of headfakes. The will be a lot of volatility both up and down, but I think we will have one big nasty down move (maybe as low as 700) before we start heading up again.

My reasoning for this: There needs to be a shake-out of the unhealthy bulls. These are the bulls that jumped on board the last 3 weeks after the claims in the media that the bear market is over. These guys are completely speculating, or do not know how to perform any FA and are just jumping on the bandwagon. These bulls will dump there stocks at the first sign of a pullback. I think this will help to build a healthy pullback for a continued rally (the large Wave {C} listed in my first EW chart. However, this is still ultimately just another bear market rally.

Short Term Count

And just for completeness, here is my count for the B Wave of the current advance



Enlarge

If my count is correct and next week does not climb much higher, then I believe the move on Thursday and Friday of last week are a 1-2 in a 1-2-3-4-5 that will make a C move correction.

Conclusion

Wow. That was a massively long post. Please feel free to comment. I put a lot of research and thought into this, so even if you don’t agree with my conclusion, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.

Report this comment
#2) On May 10, 2009 at 11:29 PM, Mary953 (38.93) wrote:

This is highly frustrating.  For some reason, I am not able to rec your blog.  Rest assured that I will continue to try and if the program still will not allow it, I will do so with help from TMF if need be.  This post needs to be seen by as many as possible.  I posted a note within the chatroom shortly after you put this up.  Thanks for the amazingly informative blog.  Highly agree!!!

Report this comment
#3) On May 10, 2009 at 11:48 PM, JGus (29.38) wrote:

Binv - Awesome post! That obviously took a lot of time and effort. You and I see things playing out almost exactly alike. Keep up the great work and thanks again for all the effort you put into pulling all of this information together!

Report this comment
#4) On May 11, 2009 at 12:04 AM, RussWild (< 20) wrote:

Mr. Green, Your amazing in your own path..... simplay great work. This is what it's all about.. Taking everyting you learned and apply it to a conclusive stategy!! Nice, bro!!

Report this comment
#5) On May 11, 2009 at 12:16 AM, Tutom (< 20) wrote:

Good work binv! Great food for thought. That was a very anemic push up on Friday. Big gains, but few sector participants except financials and energy. Very suspect, but if everyone jumps in... Careful about the Nasdaq. It may just be waiting for the Dow to catch up. BTW, I see some good companies that presented good earnings and have had descent retracements. They could be setting up better bases. This will certainly be a traders' market. But, what to trade? Inflation trade: oil, NatGas, Yen (short on the basis that carry trade will come back to help inflate us).  I think DIG and DUG and UNG may offer the most profitable trades coming up. I'm not big on gold until it goes below 800 or breaks out above 1000. Do you read John Mauldin? Doesn't think inflation will be a problem for a while. This first inflation trade could also be a headfake. Yikes, I'll never make another investing decision again!

 

Report this comment
#6) On May 11, 2009 at 12:33 AM, awallejr (80.12) wrote:

Binve at the outset let me tip my hat off to you for an  incredible blog.  That said, I honestly don't know where your source is for the S&P P/E.  I've read elsewhere that it is more like 14.  Even according to Value Line, their world of stocks is valued at a 13.9 PE, with a low at 14.1 and a high at 19,7.  Assuming the accuracy of VL, we are still under a bear low on 10-9-02 despite the runup. 

While I disagree with your conclusion, I still feel this runup has legs (tho a small correction might occur), I applaud you for at least presenting a well thought out argument.

Report this comment
#7) On May 11, 2009 at 12:44 AM, StopLaughing (< 20) wrote:

Go look at the short interest on the banks. The bears a making a lot of talk but their money is not short.

Since interest rates are at extreme lows you would expect P/E ratios to be higher than normal at the bottom. 

The market is driven by derivatives which means that it is more likely to go straight up and down and have a V bottom.

Further, the normal tech analysis will not act right since governments are controling events and the timing of the news, not to mention the spin.

In addition, soveriegn hedge funds will have inside information and take positions in the derivatives before the news is released.  You may not see it directly as those positions may be in the form of spreads and hedges.

Asia has modest profit taking. I would not be surprised to see modest profit taking in the US. 

Report this comment
#8) On May 11, 2009 at 1:07 AM, binve (< 20) wrote:

Just checking in before I go to bed and there are already a great set of comments!

Mary953. Thanks Mary! I really appreciate that! Our posts went up at nearly the same time with a lot of similar thoughts. Great minds think alike :)

JGus, Hey thanks man! I really appreciate that. I defintiely agree we have a very similar take on the economy and the outlook. I have really enjoyed your series of posts on the BLS / unemployment. Thanks!

RussWild , Thanks man! Yeah, I really want to take the time to write down and document my thoughts as a re-payment to all of the excellent blogs and analysis that I have read on Caps the past year and half (as binve and binv271828). Encouragment from guys like you always make me want to worker harder. Thanks!

Tutom, Thanks Tom! Yeah, this rally is showing cracks in the armor. I believe this is the top near term, but some sectors may continue to fight gravity's pull this week. We will see. I am with you, I am exceptionally bullish long term on Oil and Natural Gas. I have long term investments that I will not selll for decades probably. But as a trade, at the current moment, I do not like the entry. I bought oil at $35-40 and sold at $55. I am a huge short term bull with a pullback to $~42. But I am very dubious about an entry right here. Very overbought, and oil will probably correct when the stock market does. Energy will be the first sector I go long on after the correction. Yeah, I do read Mauldin. I like him, he is a teriffic analyst. But I tend to agree with only about half of what he writes (I read him precisely becuase I don't agree with him and I want the contrary viewpoint). An analyst that I agree with more often than not and who is just as sharp as John Mauldin is Steve Saville. If you have not already, I would highly recommend checking him out. Thanks man!

awallejr, Wow Thanks! I really appreciate that! I know that we have had our difference in the past and that we will continue to have our differences. But you are very gracious and reasonable, it is thoughtful people like you why I bother to write.

As far as the P/E, I don't get the PE from other sources, I look for earnings estimates. The P/E changes all the time (since the price is changing). So I find it much more usefult to calcuate it myself as the price is changing.

I get analyst estimates from a lot of different sources. It is important to get it from different sources because there is a lot of variation depending on different estimation types (whether it is a bottoms-up or a top-down estimate, whether it is operating earnings vs. full, etc.) Then I discard the mega-bullish or uber-bearish estimates. Then I take the average of the ones from reasonable sources.

This is where my 2009 earnings estimate of $~40 comes from. So right now the S&P is at $925. The P/E is $925/$40 = 23.1. This is way too high for such bad economic conditions and a reason why I am so bearish on this rally.

And I am very glad you disagree. Because the only thing I know for sure is that I am not completely right. And so those with opinions different than my own will help me get closer to the truth and what will actually happen. (I am not the biggest bear now, or for what will happen in the future, I just happen to be on the bearish side of neutral, a "medium-bear" if you will :) ).

Thanks for the comments!

StopLaughing, Thanks for the comments. The short interest argument is a good one, but a lot of this is probably fear that the government will reinstate short selling bans. But the fact that the banks are up so much on both "true bulls" and "unhealthy bulls", means lots of volatiliy (such as the +/- 30% moves in XLF with a few days time the last month). A lot of these "unhealthy bulls" are going to jump ship at the first sign of weakness, leading to a cascade effect downward. Just my take.

But the fact that derivatives are driving the market (my statement that financials are the cancer of the economy) is precisely why this is a bear market rally and not a new bull market. Again, just my take.

I think this is just one instance where we have to agree to disagree on the conclusions reached from the data :)

 

Report this comment
#9) On May 11, 2009 at 1:38 AM, awallejr (80.12) wrote:

"A lot of these "unhealthy bulls" are going to jump ship at the first sign of weakness, leading to a cascade effect downward. Just my take."

You know I can see this happening.  I actually can see people panic selling should  there be a correction.  I blogged this elsewhere as a possiblity for THE bottom.  Namely people jumping back on board, only to get burned again on a decline leading to ultimate capitulation.

Personally, I will get hurt if that does happen, but I still have cash on the side waiting for that possibility. 

Of course the contrarian would say that because people are expecting that drop it just won't happen, heheh.

Report this comment
#10) On May 11, 2009 at 4:34 AM, bothisellhigher (29.56) wrote:

Bravo! A fine effort of putting your thoughts and research in written form for the benefit of others...more information for us to use in our investing/trading decisions.  I am in full agreement with your thesis that we will soon see the S+P back down around 735-725.  I also see that as an ok thing as it would give us a double bottom and probable end to the bear down trend...

My trades nevertheless remain long...I agree with everything you argued about financials.  The fact is though, that they continue to rise and I make money because of that rising- (UYG).  Of course it will end (for awhile) when it heads down...but if prices get through 934-940 S&P...However they were to get through...then the next stop isn't until 1005...

If prices bounce off 934-940 and head back down, I'm out (w/closes below 874...)...and "financials" will have still been a great ride and successful trade. ( I'm thinking SKF for the trip down.) (I'm keeping the other 1/2 of trading funds in AUY) 

At any rate, keep up the good work.  Your Karma improves big time as you continue to help others.

Report this comment
#11) On May 11, 2009 at 7:36 AM, kaskoosek (97.84) wrote:

Binve 

Awesome work, greatly appreciated.

Report this comment
#12) On May 11, 2009 at 7:50 AM, crystlz (60.05) wrote:

Binve,

1 rec from me.

Thanks for all of your hard work, this is a great post. It will be interesting to see what lies in store for us in the near future. I, like you, am stunned by the price action in the financial sector, how can this be sustainable?

peace, bro 

Report this comment
#13) On May 11, 2009 at 8:48 AM, binve (< 20) wrote:

awallejr, Hey. I thing that I never wish for anyone is to lose money on their trades. For what its worth, I truly believe this is what will happen, not out of some king of craze to be "right", or to defend my own position because my mind is made up, but rather when I look at the data and price action and try to interpret it through TA and FA, this is what I come up with.

This may be a good time (if you are still very bullish / mostly long) to buy some short side protection (short ETFs or Puts). You can see from my positions above that I started this rally on the long side (no shorts). I transitioned halfway through to partial long and partial short to hedge my bets. If this rally does end and we start heading down, I will be come more bullish, and get more bullish the lower we go. And eventually I will start covering shorts and go long (in energy first). I am sharing this to let you know I am not an uber-bear. And maybe this strategy might be of use to you from a protectionary standpoint.

Of course the contrarian would say that because people are expecting that drop it just won't happen, heheh

LOL!. Exactly :) The market can stay irrational longer than you can stay solvent. Yeah, I could be wrong on this call, and if so I may have to stay short longer than I anticipate. And this is just part of the game :). Take care man, and thanks for the comments!

bothisellhigher, Thanks! I really appreciate that!

If prices bounce off 934-940 and head back down, I'm out (w/closes below 874...)...and "financials" will have still been a great ride and successful trade. ( I'm thinking SKF for the trip down.) (I'm keeping the other 1/2 of trading funds in AUY)

I think SKF will be a good call for the trip down. And I love AUY. I have quite a lot of investment money in them (long term) but I have also traded them successfully 4 times since December. Sticking to strong GSM (and AUY is one of the best) is a very good call.

At any rate, keep up the good work.  Your Karma improves big time as you continue to help others.

That is exactly why I do this. If my analysis helps to either make or save someone some money, then it did its job. Thanks!

Thanks , kaskoosek!

crystlz, Thanks, I really appreciate that! Yep. This week will be an interesting week. Peace :)

Report this comment
#14) On May 11, 2009 at 8:53 AM, DanDarby (< 20) wrote:

Nice post binve! Thanks!

Report this comment
#15) On May 11, 2009 at 8:55 AM, ttboydxb (30.15) wrote:

Fantastic Work, A+++

Report this comment
#16) On May 11, 2009 at 10:58 AM, evilrage (< 20) wrote:

This was an excellent read. A lot of thought and analysis went into it. Thanks for sharing, binve!

Report this comment
#17) On May 11, 2009 at 11:06 AM, outoffocus (24.46) wrote:

Good job Binve. If this post doesn't convince the Fool community I dont know what will. 

Also, if financials are the cancer, then the bailouts are the chemo. In other words, the bailouts will keep these banks alive in the short run but in the long run they are only going to make things worse (and extremely expensive).

Report this comment
#18) On May 11, 2009 at 11:10 AM, eldemonio (98.84) wrote:

binve,

 

Great post and analysis.  We haven't seen the bottom just yet.  I base my opinion on this news.   Adult ADHD can be the only reason for this rally - and once we start medicating the investors buying into this market - we should start to see some correction.

Report this comment
#19) On May 11, 2009 at 11:21 AM, binve (< 20) wrote:

DanDarby, Thanks man!

ttboydxb, Thanks, I appreciate that!

evilrage, Thanks ER, not a problem :)

outoffocus, Thanks!

Also, if financials are the cancer, then the bailouts are the chemo. In other words, the bailouts will keep these banks alive in the short run but in the long run they are only going to make things worse (and extremely expensive).

I definitely buy this analogy.

eldemonio, Hey man, thanks! Your link doesn't seem to work (must be the meds man, you need to up your dosage :) ), but I will definitely agree that adult ADHD is the reason for this rall.... oh look, a penny.... what were we talking about? ... :)

Report this comment
#20) On May 11, 2009 at 11:52 AM, EnigmaDude (96.33) wrote:

Thanks for presenting a bearish viewpoint that is backed up with actual facts, figures, and charts. I get so tired of reading all the emotional and irrational rants from other CAPS bloggers who seem to be prolific on this site that it almost makes me more bullish than I probably should be lately. Your post helps me to stay patient and wait for the market to make up its mind which way its going to go.

That is not to say that I am sitting on the sidelines. I have put about 50% of my cash to work so I don't miss out completely. And I am seeing some stocks whose earnings have grown even during the past 2 years of stale conditions. For example, I just increased my position in CDE based on the notion that silver demand is likely to increase.

Anyway - I am learning a lot by reading your blog posts so please keep it up!

Report this comment
#21) On May 11, 2009 at 12:09 PM, APJ4RealHoldings (25.77) wrote:

I prefer technotranceanalysis rather than TA

Report this comment
#22) On May 11, 2009 at 12:27 PM, binve (< 20) wrote:

EnigmaDude, Thanks man! Yeah, I am bearish on the market short term, but thing we will get a continued rally after a healthy (read severe) pullback. For for the long term (years / decades) I am still very bullish and very long on gold, silver, GSM, oil and commodites. I also like silver's fundamentals near term and long term. Thanks!

APJ4RealHoldings, .....? .... okay.

Report this comment
#23) On May 11, 2009 at 12:51 PM, Londamania (63.23) wrote:

As always, an awesome post.  If you don't find something to think about in this post, you are truly brain dead :) 

Your long position is at least part of what I have heard referred to as a reflation trade.  As far as stocks to buy into at corrective low points (including perhaps the one coming up if it does) what is your opinion about the industrial stocks that will be getting a large part of the stimulus?  Stocks like GE, Steel, TIE...also any take on China/Emerging markets and the companies that do business their?

GE seems like such a great play to me - lots of stimulus, it's in China, World's richest man (or second richest depending on the month) can use (and has incentive to use) PPIP to bail it out of the bad financial toxicity if needed and it still gets to ride the great yield curve banks have right now, it got pummelled in Q1 and is still arguably too low...seems to have a lot going for it.  I would very much value your thoughts on this stock in particular vis a vis the scenario you paint here.  Assuming a buy in at major market low spots say at or below 750.

Past SPY 750 how badly hurt will the stronger market leading companies be in your assessment?  They may actually do well as weaker competitors drop...if we get a drop down to 750 in the near future would you still stay clear of a company like Intel or CSCO or GE or is that a point to get in at least a partial long term position?  Take GE - P/E currently 9 and earning projections out through 2010 is largely flat at a few cents lower/share than it is today.  I know the earnings forecast are hard right now but might this stock be at or near it's low even if the market drops a lot?  Meaning sure it would dip but come right back...

Report this comment
#24) On May 11, 2009 at 12:54 PM, jddubya (< 20) wrote:

Great post binve!!  This is the kind of stuff I look forward to here.  Much better than the 'technotrance' worthless waste of time garbage (sorry Alstry, but I'm all about my opinion, lol) noise, you've got major signal here!

Report this comment
#25) On May 11, 2009 at 1:06 PM, outoffocus (24.46) wrote:

This post is starting to look like a GoodVibe post.  I guess people rally do like TA.  Maybe I should post a S&P chart in my next post and see if that gets me like 10 extra recs. lol

Report this comment
#26) On May 11, 2009 at 1:10 PM, PrestonCheek (35.24) wrote:

binve, great post and very informative thinking and writing.

It's nice to be able to see the thoughts of someone looking at both FA and TA.

Keep up the good work.

Preston

Report this comment
#27) On May 11, 2009 at 1:21 PM, binve (< 20) wrote:

Londamania, Thanks! I really appreciate that! I am always happy to recieve your comments :)

Yes, I think the reflation trade will be a good one. Not becuase it helps the economy, but it helps commodities (which are finite and REAL) and companies that deal with commodites move much farther ahead relative to the actual economy. The Fed has stated many times that it will use all powers at its disposal to fight deflation. The means by and large the creation of new FRNs (Federal Reserve Notes, fiat currency, or commonly the US Dollar) out of thin air. Whether this is good or bad (I have strong opininons on this) I will not say here. But I will say "don't fight the Fed". And if the Fed wants to try to inflate us out of this mess, then there are obvious benefactors. Namely gold and commodities.

As far as near term: after this pullback, I think a lot of commodity producers (but more importantly the underlying commodities will benefit a lot. Stocks and ETFs that I will look at first are "trades" that are "investment quality" (i.e. ones that I don't mind or actually do have in my investment account). These would be: USL, UCO, USO, UNG, BTE, PVX, PWE, ERF, PBR, COP, STO, RIO, ACH, AA, X, HAT.V, HBM.TO, RJA, SYT, MOS, POT, etc. And I think gold/silver/GSMs are always candicates for long term investment: CEF, SLW, AUY, CDE, HL, EXK, NG, GDX, PAL, etc.

Now you specifically asked about GE. To be honest, I would not touch them with actual investment money with a 10-foot pole. I love their tech, but I hate their financial exposure / operations. They might be a good trade. But as I have said in my post, "financials are the cancer of the economy", GE could be a hugely successful trade, or as the Option ARM crisis gets underway and financials tank, GE could get cut >50%. I don't like that risk. There are much better both trades AND investments to be made, in my opinion.

But this is why all my long term money is and will continue to be commodities based. Because until all of the items that I list above in my FA summary section, we are not at the bottom. And the broad market remains at risk for another big fall. 

Thanks!

jddubya, Thanks I really appreciate that!. More than happy to "share the signal" (well, at least how I am interpreting it :) ).

outoffocus, Maybe that should be one of hall9999's rules :)

PrestonCheek, Thanks Preston!. Yeah, I try to to TA/FA/EWP on as many sectors and as many timeframes that I can wrap me (wee) brain around :). It always pays to look at the big picture. Thanks man!

Report this comment
#28) On May 11, 2009 at 1:29 PM, herztical (28.71) wrote:

Binve

Intereting post and very thorough.  Of course I have other thoughts.  I believe financials are adequately priced now given 0 has been taken off the table and given ablity to raise additional capital has been very successful. why you ask?  To get Gov out of their business and to capitalize to the amount they should have been at in the first place!  bankers are supposed to be CONSERVATIVE!  Something we may have forgotten over the past 10 years.  PEs could be considered high but future PEs could come in line (yes we could be setting ourselves up for future failure).  AltAs are not a big deal for banks anymore since the GSEs (taxpayers) are footing the diff back to 100%.  Also don't discount paying depositors 0% and either loaning OR investing at say 3-10%. Financial institutions are printing money right now and have 100% suppost of US govt. This is so they can write off the garbage or spread the pain to other private investors buying into treasuries toxic asset purchase program.  Also I think unemployemnt is actually a GOOD thing as companies become more efficient moving forward (higher earnings) and a re-allocation of work force is always needed too improve an aging ecomomy; ex industrial revolution (ex. auto workers moving to say solar jobs).  While home prices will continue to fall in certain areas the artificial low rates will suck up inventory especially when you consider builders not churning out new homes as in year 2000+.  My biggest bear bet (as we have talked about) is on US govt. debt and inflation. 

Report this comment
#29) On May 11, 2009 at 1:44 PM, binve (< 20) wrote:

herztical, Thanks herz. I love contrary opinions, and yours are always well-thought out. I know that we have a difference of opinon on financials, so allow me a short rebuttal to what your wrote above.

I will concede that Alt-A is not as big of a deal for finanicals since many of these were originated by Fannie and Freddie and are now hence under the purview of the government. However Option ARMs are a completely different story. These are the low "teaser-rate" refis that we very popular in 2004-2006. In fact I have several friends who have these mortagages only to find out they cannot sell their homes now without taking a huge loss and are facing a more than 2x increase in the mortgage payment in a couple of months. Finanicals have HUGE exposure to these mortgages. This is coming down the pike and it will get UGLY.

As far as unemployment, I agree in principle if those new manufacturing jobs in alternative energy / tech were in place. But they are not. And the truth is consumer spending is still 70% of GDP. So for your scenario to play out, we have to go through a huge contraction in the economey and the market, while we transtion from consumers to producers (which is my scenario).

I really enjoy our conversations man. Thanks!.

 

Report this comment
#30) On May 11, 2009 at 1:57 PM, ocsurf (< 20) wrote:

"This is smells exactly like gambling euphoria to me, such as when you have a suited Ace-King, but a 6-7-8 of an opposite suit flops out. You keep betting, expecting and Ace or a King to come out on the turn or the river, but odds are that you are just going to be beaten by someone with a straight. The smart money will “fold” soon and wait for a better setup."

 

Quote of the year!!!

Report this comment
#31) On May 11, 2009 at 2:23 PM, binve (< 20) wrote:

ocsurf, Thanks!, that was a fun one to write :)

Report this comment
#32) On May 11, 2009 at 2:47 PM, ocsurf (< 20) wrote:

binve from what your charts are saying it looks like the July timeframe may be a good entry point for the next possible rally. I've been looking at AUY, UNG, DIG, and DUG. In your opinion would this be a good entry for these stocks?

Report this comment
#33) On May 11, 2009 at 2:57 PM, binve (< 20) wrote:

ocsurf, Yeah, I that that is a good call. I am long to go long on energy and probably some GSMs after the pullback. Both the $HUI and Oil bottomed before the stock market did, so I would look for them do perform similarly for this next pullback and then continued move up. Natural Gas has also recently started basing and making the case for a convincing bottom too.

I would look for the $HUI to come back down to ~$240-$250, burn off the overbought on the stochastics and then flatten out for a couple of weeks in price. If that happens the I am a big short term bull on miners (I am and will continue to be a long term bull on GSMs).

If oil comes back down to ~$42. The I am a huge bull there too. I will probably start adding small amounts if it gets down to $45. 

The problem with targets is that the market might not reach them. But I prefer to wait for a good entry than to buy overbought conditions. I am a patient guy (sometimes). Thanks!

Report this comment
#34) On May 11, 2009 at 3:11 PM, herztical (28.71) wrote:

well said Binve, just hope that people who have ARMs are refinancing to fixed OR if they don't have enough equity in their house to do so are negotiating better rates.  I know CFC (now BAC) is doing this constantly; agree that they will run into some problem cases.  The question is if we are just setting ourselves up again and postponing the ARM "pain" to another 3 years out.  This is why the govt HAS to keep mortgage rates down no matter what inflation is doing; why bull on comods, energy, and some gold

Report this comment
#35) On May 11, 2009 at 3:22 PM, binve (< 20) wrote:

herz, Exactly man. At the end of the day, I don't think our positions are too dissimilar. We both agree that inflation is the long term problem and that commodity realted investments are the best way to play that long term. We differ on the short term valuation of financials but the way finanicals get handled via the Treasury and Fed (QE, interest rate suppresion as long as that game will last, and massive inflation) have the same outcome based on our statements. Thanks man :)

Report this comment
#36) On May 11, 2009 at 3:39 PM, buildgreen (< 20) wrote:

Great post everyone. This is why I come to the fool. Excellent dialouge.


Regards

Report this comment
#37) On May 11, 2009 at 4:06 PM, JGus (29.38) wrote:

Binve - Congrats on having the 12th most rec'd blog post of ALL TIME on CAPS (and accomplishing that feat in less than 24 hours)! I hope all these rec's are a small form of 'payment' for all the hard work you put in!

Report this comment
#38) On May 11, 2009 at 4:24 PM, ozzfan1317 (79.43) wrote:

I wanted to say thank you for an objective opinion. Although I believe it is possible this rally has legs. Things are still prett shaky with our economy and near flat growth could be the bright side for a little while. I personally think that the economy has reached its bottom but this is just my educated opinion and I make no promises that any recovery will be be as quick as many seem to think.

Report this comment
#39) On May 11, 2009 at 4:38 PM, binve (< 20) wrote:

buildgreen, Thanks! Yeah, I often find that the comments section of most posts are sometimes more informative that the main post! We have such a wealth of knowledge and opinions among CAPS users, it is really quite awesome.

JGus, Dude that's just crazy! This post must really be striking some chords! I love the recs (who wouldn't), but I love the dialogue more. As far as payment, I am so indebted to all of the great CAPS authors who have written useful posts (floridabuilder, DemonDoug, TMFSinchiruna, GoodVibe, TastyLunch, anchak, etc. etc.). I am just glad to be able to add to the coversation :) Thanks!

ozzfan1317, absolutely. I try to be objective with my opinion whenever I do an analysis. I like to spice it up with jokes and saying that things "stink" (because it is more fun to read and write). But at the end of the day, I try to have as unbiased an opinion as possible and see what conclusions I can draw. Thanks!.

Report this comment
#40) On May 12, 2009 at 2:01 PM, arboretum (28.82) wrote:

Tremendous post binve. I am with you on everything apart from the timing of the pullback: I am not convinced it will be immediate or sharp. A volatile drift lower over the summer also seems likely, although this may not fit with the EWT.

I am also long commodities and short financials and real estate, but I am a bit unsure about gold. Decreasing volatility and a 4x increase in gold over the last 4 years may offset it's power as an inflationary hedge. I am thinking silver may be a better bet.

Report this comment
#41) On May 12, 2009 at 5:52 PM, binve (< 20) wrote:

arboretum, Thanks, I apprecite that! Yeah, this pullback will be hard to characterize because the rally up was so hard and there are so many bulls around.

If you are unsure about gold, but like silver, might I suggest CEF? 50% gold / 50% silver, rigours auditing, smart management (non-dilutive share offerings that are well timed vs. NAV), and in Canada! They are the best (and my biggest long term holding, for disclosure). Thanks!

Report this comment
#42) On May 13, 2009 at 12:53 AM, portefeuille (99.78) wrote:

on the longer term perspective (from here):

...

We are in year 9 of an 18-year secular bear market

The S&P 500 peaked in real terms back in August 2000. Adjusted for the CPI, it is down 58% since that time. So, we would say that we are in year 9 of what is likely to be an 18-year secular bear market, because if you look at long waves in the past, they tend to last about 18 years with near perfection.

What happened during the last secular bear market

As an example, go back to the last secular bear market, and you will see that the S&P 500 peaked, again in real terms, in January 1966 and bottomed in July 1982, 18 years later. But there were plenty of mini-cycles in between. In fact, there were four recessions and three expansions during that entire 18-year period and unless you were a completely passive investor, you definitely wanted to be in the game during the three expansions because the S&P 500 rallied an average of 50% during those phases. Again, it is important to note that these were rallies you
could rent, not own, but they did last an average of 20 months. So, it’s not exactly as if they have an extremely short shelf life.

Playing a game of devil’s advocate

With all this in mind, we went through an exercise over the weekend and played a game of devil’s advocate. If Rosie had to face off against Rosie, what would we say if we were forced to take the other side of the debate, keeping in mind that in fact, we may be overly bearish at the present time. And believe it or not, we did manage to come up with some pretty compelling material.

Past the half-way point in the recession

First, our in-house model of predicting where we are in the cycle, for the first time, gave us a signal late last week that we are past the half-way point in the recession. Considering that the stock market bottoms 60% of the way through, this is an encouraging signpost.

We’ve worked through the effects of the Lehman collapse

Second, our propriety proxy for private sector interest rates has come down from 8.11% at the nearby peak to 7.18% now despite the backup in Treasury yields, to stand at their lowest since last September. The TED spread is back to where it was last September, as are most credit spreads. The VIX has finally broken to 35, back to where it was last September. 10-year TIPS breakeven levels, which were predicting deflation at the end of last year, are now forecasting 1.5% average inflation rates for the next decade. Again, we last saw this in September of last year. This is interesting because even though the economy and the markets were clearly in the doldrums back in September, the fact that so many market barometers are back to where they were then means that at the very least, we have worked through the ill-effects of the post-Lehman collapse.

Stock market has lagged relative to other asset classes

All an equity bull really has to do is point to the fact that the S&P 500 last September was trading around 1200. The only difference is back then we were looking at it from the perspective of being 20% off the highs whereas a move back to September levels, which, after all, would only mimic what many other market indicators have accomplished, would be viewed as an 80% surge off the lows not to mention another 35% potential upside from where we are today. Even the CRB raw industrials are now back to where they last October when the S&P 500 was hovering around the 950 level. So again, if we were equity bulls, and maybe we should be, we would simply point out that of all the asset classes that have bounced back to life, the stock market has actually been a laggard.

Three indictors that suggest cyclical bear market is over

Third, we found three indicators that have stood the test of time and strongly suggest that the cyclical bear market in equities and the economy have drawn to a close: the ISM, the Conference Board’s coincident-to-lagging indicator and the University of Michigan consumer sentiment survey. The ISM bottomed in December 2008 at 32.9 and is now 40.1. Going back to 1950, we found that recessions end within three months of the ISM hitting bottom, and never by more than six months. The coincident-to-lagging ratio just turned in successive lows of 89.6. The data go back to 1960 and we found that recessions ended within two months of this indicator, 100% of the time. And, the U of M consumer sentiment index bottomed at 55.3 last November. As we saw on Friday it had rebounded to 65.1 as of the end of April. The data show recessions end typically within six months of the bottom in this key leading indicator, and not once was the lag longer than eight months.

We could be on the precipice of a cyclical upturn

This is not to say that our secular views have changed. However, we could well be on the precipice of a cyclical upturn, and whether it is sustainable or not may have to be a story for another day. We don’t see as many green shoots as others do, but then again, we endured more than a year of jobless recoveries following the market lows of 1990 and 2002.

The most glaring example

The most glaring example of all is the fact that the S&P 500 bottomed in the summer of 1932 and yet by the end of the 1930s, seven years after ‘New Deal’ stimulus, the unemployment rate was still 15%, consumer prices were deflating at a 2% annual rate, and let’s face it, the Great Depression did not actually end until 1941. But for investors, the worst was over in the summer of 1932 in the immediate aftermath of the acute government intervention at the time. While
there were recurring setbacks along the way, including the severe bear market of 1937-48, the fundamental lows had already been turned in long before.

Investors have been able to price out financial tail risks

Fast forward to March 2009, and the same mantra was heard – ‘nationalization’, ‘depression’ and ‘deflation’. As was the case with FDR’s early days as President, what the last half of Obama’s first ‘100 days’ managed to accomplish was to eliminate these words from the investment lexicon. The degree of intervention from the Treasury and the Fed has been so intense that investors have been able to price out financial ‘tail risks’ that had dominated the market landscape through much of the first quarter.

The market is gravitating to a new mean

So, the way to look at the situation is that by removing the ‘tail risks’ of an outright systemic financial collapse, the market has gravitated to a new ‘mean’ (in the sense that at any given point in time, market prices reflect some expected distribution of possible outcomes – a very bad potential outcome has been taken out of the probability distribution, at least according to Mr. Market). This is why if the bulls have a solid argument, it is the prospect that the S&P 500 can indeed approach those pre-Lehman levels, which back in September, seemed rather bearish, but is only bullish today benchmarked against where we are.

Still not sold on the bull case for equities

Despite all these powerful arguments, we are still not totally sold on the bull case for equities. Valuation is not compelling, in our view. Sentiment has completely swung towards a bullish consensus (which is a contrary negative). Home prices and employment are still in freefall, the former undermining the balance sheet and the latter exerting a drag on the income statement and suggestions that a mild improvement in the negative growth rate is something to be excited about seems off base.

Difficult to ascertain who the marginal buyer will be

It seems hard to believe that after being burned by two bubbles seven years apart that the baby boomer is going to line up at the trough one more time. So, it’s difficult to ascertain who the marginal buyer is going to be. Disposal of durable goods assets to pay off a record household debt burden seems like a multi-year deflation story as far as we are concerned. Since the boomer household is income constrained and underweight fixed-income securities on its balance sheet, we believe that demand for high-quality bonds is going to strengthen in coming years. Government policy will remain highly pro-cyclical but there is no match for the contractionary effects from a shrinking US household balance sheet.

Deflation will win out over inflation

We are concerned that deflation will win out over inflation this time around. While the data cited above are indeed impressive in terms of their track record, since this is not a manufacturing inventory recession but rather a downturn deeply rooted in asset deflation and credit contraction, we may find out that the economic releases that were tried, tested and true in the other post-war cycles may not be appropriate today given the overpowering secular trends of consumer deleveraging and frugality.

Report this comment
#43) On May 13, 2009 at 3:53 AM, uclayoda87 (29.82) wrote:

binve

Standing ovation for this blog:  You get my Daniel Hannan award for the most eloquent speech addressing the disconnect between the current market and the economy.  Enjoy the video.

http://www.youtube.com/watch?v=94lW6Y4tBXs&feature=related

 Your blog gives me hope and concern about my current holdings.  I bought FCX, PCU, SQM, FTEK, CNQ, PD, XOM, USAGX and other energy and mining socks at very low prices in Nov/Dec and early March.  With the recent fall in stocks on monday, I thought I might sell my positions later this week, but if energy and commodity stocks will hold up better than the rest of the S&P 500, then maybe I should hold these longer, even knowing that they may fall 10% to 15%, before they rebound back up.  My "cash" position is still in GLD, although I will likely add CEF for its silver exposure.

One thing that I had not seen recently on the blogs is the tax consequences of holding securities beyond the expected increase in the Capital Gains/Dividend taxes.  I will likely liquidate most of my stocks positions and go into GLD/CEF to perserve buying power and avoid a major tax hit.  Also, I suspect that right before the new tax rates go into effect, that there will be significant selling of securities.  It would be nice  to be sitting on a bunch of cash/gold at that time, since you may be able to buy good company stocks at a very low price.

Again, thanks for this blog.

Report this comment
#44) On May 13, 2009 at 4:05 AM, Ewok82 (29.82) wrote:

Excellent blog discussion!!!  Exclamation points are well deserved.

Report this comment
#45) On May 13, 2009 at 8:18 AM, binve (< 20) wrote:

portefeuille, Thanks for the comments! I am not sure what your stance is (are you advocating these points? Do you agree / disagree?). At any rate, I agree with many of these observations (and disagree with a few). There are so many that I won't adress them all, but here are a few.

We are in year 9 of an 18-year secular bear market

Yes! This is true!! The observations on the CPI are entirely correct too. 2000 was the top, not 2007. There is a concept called Long Valuation Waves (LVW) and it is a 33-36 year cycle. Each bull phase lasts 17-18 years and each bear phase lasts 17-18 years. We are in the bear half of the current LVW and about halfway through the bear half. I agree with the above observation. Now here is where things get interesting.

Your articles says we are about halfway through the recession and that the stock market bottom 60% of the way though. It seems to be calling for a bottom in stock prices (or that we are near the bottom). I don't agree --- sort of. Let me explain.

I think we could hit a bottom in prices for this cycle somewhere in the next 2 years. and there is a support zone on the S&P around 450-500 from 1993-1995. Now have we gotten to the bottom of the LVW cycle? No. So what gives?

I think we will find a bottom in prices and staganate there for many years. Markets bottom in terms of valuation at broad market PEs of 6-10. At 666, based on 2009 estimates, we only got down to ~16. Too high. Higher even than the historical average. Lets just continue to use an earnings estimate of $40 for the S&P. This is the "average" earnings estimate for 2009. I highly doubt the earnings will grow substantially in the next 2-3 years, in fact I expect we will continue to have earnings contraction as we have the last 2. If the S&P gets down to 450 and earnings are 40, then the PE is 11.25. Still too high for a true valuation bottom but much closer.

So why my staganant prices forecast? Because I think the S&P will find the right price target, sit there for a few years while earnings catch up. Why will this happen? Because of massive inflation. I think earnings will become inflated and then meet the bottoming conditions for historical bear market bottoms for PEs.

I disagree wholeheartedly with your last point. I don't think this recession / depression will be deflationary. The Fed and the Treasury have said repeatedly that they will use every tool at their disposal, chiefly the printing press, to combat deflation. If you think we have seen the last of the QE shocks, I would reconsider. The Fed is going to try to put a floor in interest rates like there is no tomorrow, and this means the massive creation of new dollars. The addage "Don't fight the Fed" very much applies here. I will not comment here whether this policy is good or bad (I do however have very strong opinions on the matter), I am just simply recognizing what is likely to happen.

Thanks, I really I appreciate the comments!. You are welcome on any of my blogs at any time. I must sayin I am seriously impressed with your huge success in CAPS. I sincerely hope your investement account does as good as your CAPS score, and then you will soon be rich :) Take care!

uclayoda87, Thanks man! I really appreciate that. With regard to your holding, I would just be very cognizant of timeframes. All these picks are mining and oil/gas plays. No matter what happens in the next couple of months / years inflation is the driving issue.

I have two accounts, one trading and one investment. I make a huge distinction between the two. In my investment account, it looks similar to your portfolio above (CEF, AUY, SLW, AEM, HL, CDE, GG, EXK, COP, PAL, etc. etc. ) I am planning on holding these for years, maybe even decades. There is no "timing" that I will be doing for my long term investements. I would only suggest that you think about timeframe targets. If you only want to hold these for 1 year or less, then you might get a better selling point in the next 6 months (I think oil can easily go to $75-$80 in the next 6 months, for example)

Yeah, taxes are tricky. I almost never factor them into my trades. I am trading for gains. And if I have to pay taxes on my trades, then that means it was a sucessful trade. I try to deal with one problem first (making sucessful trades) before deailing with the second (taxes) :).

Thanks man, I really appreciate that :).

Ewok82, Thanks!. Yeah, this was a fun blog to write, but I agree, the discussion is turning out better than the original post :)

Report this comment
#46) On May 13, 2009 at 3:22 PM, goldminingXpert (30.63) wrote:

Nice work. You condensed the entire thrust of my multi-week series and added your own information in one post. Despite the prodigious rec count, however, you can still get more recs spooning it out then dumping it by the gallon though. ;)

Report this comment
#47) On May 13, 2009 at 4:45 PM, binve (< 20) wrote:

goldminingXpert, Thanks GMX! I appreciate that!. I really enjoyed / enjoy your 'Market is about to plunge' series. If you look in the comments I usually added a 1-2 sentence agreement :) Yeah, there is so much about the BS that is getting waved around as "bullish fundamentals" that just rings false. A reality check shows a lot of it is unfounded.

Despite the prodigious rec count, however, you can still get more recs spooning it out then dumping it by the gallon though. ;)

LOL! Thanks for the tip man :) I don't know if you have read any of my other posts, but I prefer the "deluge" approach when it comes to blog writing :) Thanks man.

Report this comment
#48) On May 14, 2009 at 11:44 AM, UKIAHED (75.63) wrote:

Thanks for presenting a bearish viewpoint that is backed up with actual facts, figures, and charts. I get so tired of reading all the emotional and irrational rants from other CAPS bloggers who seem to be prolific on this site that it almost makes me more bullish than I probably should be lately. Your post helps me to stay patient and wait for the market to make up its mind which way its going to go.

Wow – Enigma really hit the mark for me.  I guess I was just seeing the irrational rants because they keep spamming the blogs.  I have not been around TMF long enough to get a good feel for who to read – that has changed today!

Binve – rec from me – I will be watching for more posts – and all those additional comments by other great thinkers.

Keep it up!

Ed 

Report this comment
#49) On May 14, 2009 at 12:10 PM, binve (< 20) wrote:

UKIAHED, Wow thanks man! Yeah, like with Enigma, I don't want to be a bear or a bull just for the sake of being a bear or bull (well, actually I would rather be a bull /go long, which is why I am in commodities long term). But rather I want to look at the Fundies and then the Technicals and see if they are out of whack with eachother. I want to be able to try to make sense of the price action, and you can only do that if you are a) calm, and b) dispassionate. I am not always succesful at it, but I try :)

Yeah, the comments on this post are excellent. We have a great community here on CAPS. Thanks man!

Report this comment
#50) On May 15, 2009 at 11:01 PM, RootnToot (30.38) wrote:

B,

INCREDIBLE post man, the type I wish I had the time, knowledge, and energy to write. Two fools up and 1 rec from me my friend.

Report this comment
#51) On May 16, 2009 at 9:51 AM, binve (< 20) wrote:

RootnToot , Wow thanks! Man, that is such a nice compliment. Thanks :).

Report this comment
#52) On May 17, 2009 at 3:49 AM, sumbawa (30.20) wrote:

binve: First of all, this is probably the best post I have seen on MF. And the discussion that has followed has also been top quality. Many thanks for your efforts here; no small amount of work went into this.

I agree with much of your overall thesis, but want to offer a few points:

1. S&P aggregate EPS and estimates may be higher than reported by S&P because S&P does not market-cap weight these numbers. This according to Jeremy Siegel:

The S&P Gets Its Earnings Wrong

So perhaps S&P 2009 estimates should be more like $50+ instead of $40.  

2. Single digit P/Es (or conversely 10%+ earnings yields) have marked market bottoms before, but the main prior market examples were characterized by high inflation or, as in the 1930s, high deflation. From 1977 to 1981, S&P earnings yields were over 10%. But the 10-year Treasury note (sometimes the "risk-free" yield) yielded anywhere from 7% to 14% (because inflation was high).

Today, the 10-year is at about 3%, while the 2009 S&P yield (market-cap weighted) is about 6%. So there could be a case for owning stocks at present levels when compared with Treasuries. Drop the S&P to 700 and the earnings yield goes to 8%, stocks could be very attractive.

 

So what's the best analogy to use here? The 1930s? Robert Prechter (Elliott Wave) believes so. The 1970s/80s? Severe recessions, high unemployment, high inflation. But no bursting of an asset price bubble. And no banking crisis. Or Japan 1990 to present? Bursting of a huge asset price bubble, rolling recessions, deflation, zombie banks? Perhaps Japan is the closest analogy to what we have today. 

I think the key here will be psychology, investor and consumer. The March lows, while characterized by a fair amount of fear, did not feel like a final washout/capitulation. Many market bottoms have come when the vast majority of ordinary investors swear off stocks. That feels like it's yet to come. A rally like this one can draw in enough investors, only to break their hearts when another vicious leg down occurs. Then some real lows may be put in place. The banks are still very shaky, housing still in a big mess, unemployment still rising, spending staying very weak.

As for consumer psychology, deleveraging is still ongoing. There is mild deflation at the moment and that is a danger. Deflation is largely a matter of psychology, consumers not only cutting back on spending but deferring spending in the belief that prices will drop. Once that takes hold (see Japan), it's very hard to fight. I believe that there is a near-term deflation risk and a long-term inflation risk. I'm not confident that the Fed or Treasury will  manage either of these right given their track record on banking. And they may not have many options in a deflation scenario.

My market prediction is fairly close to yours. A cyclical low later in the year (October again?) of S&P in the 500 to 600 range, based on Treasury rates staying low. Economy: worsening again with some deflation for this year and into 2010. Then a very weak, jobless recovery. Possibly inflation, but I think it's way too soon to buy gold and commodities overall may be a little early. 

In summary, a very difficult time to be an investor. It could be a trader's environment for a year or two more. 

Report this comment
#53) On May 17, 2009 at 4:01 AM, portefeuille (99.78) wrote:

1. S&P aggregate EPS and estimates may be higher than reported by S&P because S&P does not market-cap weight these numbers. This according to Jeremy Siegel:

The S&P Gets Its Earnings Wrong

So perhaps S&P 2009 estimates should be more like $50+ instead of $40. 

Siegel is wrong about that. You might want to have a look at the comments on that article. (Actually I wrote him an email having read the article pointing out the mistake he made. He did answer but somehow evaded the point I was making. I might write a blog post on that email exchange, but then again he was not treated nicely by all those commentators pointing out that very (pretty obvious) mistake, so there would probably be no need for repeating that argument. When I was writing my email I had no idea that he was some kind of "celebrity". I just thought that it might not be such a good idea to write an article for the Wall Street Journal that included such a blatant mistake. oh well ...)

Report this comment
#54) On May 17, 2009 at 4:06 AM, portefeuille (99.78) wrote:

Well, I guess I am still doing my job of uncovering little mistakes here in the blog section. You may just ignore me, probably has to do with my OCD (joke).

Report this comment
#55) On May 17, 2009 at 4:07 AM, portefeuille (99.78) wrote:

And the discussion that has followed has also been top quality.

Hope I did not lower the quality by too much ...

Report this comment
#56) On May 17, 2009 at 10:10 AM, binve (< 20) wrote:

sumbawa, Thanks, I appreciate that!. Yeah, the discussion on this blog and so many others around Caps are top-notch. I like being surrounded by smart people, and Caps users are some of the smartest on the web :).

I do want to talk about some of your points:

Thoughts on your point #1:

S&P aggregate EPS and estimates may be higher than reported by S&P because S&P does not market-cap weight these numbers. This according to Jeremy Siegel:

I do not agree with this argument. I think portefeuille is right on here. I think this is a mistake and the comments section of the original article does offer rebuttals that I think are correct, including this one:

With all due respect to the good professor, I think he has it wrong on this one:

Adding the earnings “dollar for dollar” is perfectly appropriate in that they are, by definition, already weighted according to the size of the enterprise. What would be wrong would be adding the individual per share earnings to come up with an aggregate figure for the index.

Using dollar earnings is analogous to measuring price changes as the change in the dollar value of the entire enterprise rather than price per share. This would yield the same result as weighting the per share figures by capitalization.

A $10 billion loss should affect the index equally whether it comes from a small company or large.

Moreover, when I get estimates for 2009 earnings, I look to look at a variety of sources. Because estimates can be done many ways (top-down vs. bottom-up, etc.). The S&P is not impartial when they come up with their earnings estimates. This is where my "average" value of $40 comes from, but it is at least a little comforting is close to what the S&P is forecasting :)

Thoughts on your point #2:

I have heard arguments similar to the one that you describe in your second point, and I don't really agree with it. Treasuries are at 3% right now because the Fed in putting a floor under prices via QE policies (to keep interest rates low). This is a false signal. It does not mean, as it traditionally has, that risk is low right now and stocks make a better investment.

I pesonally do not get bullish on the broad market in general until we see a lot of the things I wrote in the original post (economy transitioning from mainly consumptive to mainly productive, PEs of 6-10).

But at the end of the day, I come to many of the same conclusions that you reach at the end of your comment. All of those factors are in there. And since I believe earnings in the next 2-3 years are likely to a) drop relative to 2009 (probably), b) stay at about the same level (maybe), c) go up (I don't see that happening), I think a move down to 450-500 on the S&P starts getting us close to bottoming PEs. Will that be the bottom? Who knows. But I have read no one that makes a good case for the bottom at 666. That means that the next couple of years are prime conditions for traders and short term investors.

Thanks again for all of your thoughts and opinions! They are much appreciated :)

portefeuille , Thanks for the comments! Yeah I also do not agree with Siegel's premise in the article. And I am glad you are uncovering mistakes (especially if they are mine). This is how we all learn. When we re-examine our assumptions and find out they are wrong or need to be adjusted (I have re-examined a lot of my own positions over the last 2 years mainly because Caps authors, such as TMFSinchiruna, have challenged me to think about the economy) that is when we learn.

Hope I did not lower the quality by too much ...

LOL! Not a chance man, you are welcome anytime, corrections and all :)

Report this comment
#57) On May 17, 2009 at 11:30 AM, IIcx (< 20) wrote:

Great post binve!!!

One thing I've noticed as I've been following the TA blogs this year.

The calls for a retrace have all been too early and are frequently way to dramatic. 875 for instance missed 60 points of S&P movement to the 935 high.

"Trend is your friend" keeps ringing in my ears as a great rule of thumb. I realize that no one can actually call a top or bottom until it occurs but I also noticed that the run up never had more then 2 down days in a row and frequently only 1.

Best, IIcx 

Report this comment
#58) On May 17, 2009 at 12:47 PM, awallejr (80.12) wrote:

"But I have read no one that makes a good case for the bottom at 666."

GDP.  If GDP stops declining at -6% per quarter like it did last 2 Quarters, and even simply turns flat for awhile, there would be no real reason for another crash.  Next Q is expected to be anywhere from -2 to -4 with continual improvement for 3rd and 4th Q.  The real danger, in my opinion, is if things just sputter hard again in 2010 after the fed stimuls wears off.  The private sector would need to pick up the ball by then.  Here's a reprint of a link I posted in another blog.  Note chart 2.

http://www.econbrowser.com/archives/2007/10/the_stock_marke.html

 

Report this comment
#59) On May 17, 2009 at 5:36 PM, sumbawa (30.20) wrote:

Thanks binve, portefeuille

I think you are both correct on Siegel. His argument about market-weighting earnings is flawed. I'm surprised it passed muster at the WSJ (maybe because it was an Op-Ed?). And besides, even if we were to accept his argument, we'd no longer be able to do an "apples-to-apples" comparison on historical S&P earnings and P/Es (short of reworking a lot of historical data).

Perhaps the argument he should have made is that S&P P/Es can be temporarily distorted by companies with smallish market caps reporting huge losses - the "outliers" that some of the commenters talked about. But these outliers are temporary and the key is to look at the long-term trends. Around 1980 P/Es were truly low and around 1999 were truly high.

portefeuille: I might write a blog post on that email exchange, but then again he was not treated nicely by all those commentators pointing out that very (pretty obvious) mistake, so there would probably be no need for repeating that argument

I think that would be a very useful blog post - I'm not sure Siegel has been very kind to the folk at S&P either. In this followup article, he seems to stand by his original thesis (calling S&P's methods "completely flawed") and throws in some options theory that lost me:

How Cheap Is the Market?

binve: Treasuries are at 3% right now because the Fed in putting a floor under prices via QE policies (to keep interest rates low).

Agreed, QE is a big part of this, with a very uncertain outcome. In fact rates are moving up at present. And long-term, rates have nowhere to go but up from here.  

Overall, I'm just wondering which historical precedents may have relevance for the present crisis. To me, Japan is the doomsday scenario with a fair degree of correlation with the present.

portefeuille: Hope I did not lower the quality by too much ...

On the contrary, it's discussions like these that alone make a Fool subscription worthwhile. Perhaps a little like The Economist's mission statement:

"to take part in a severe contest between intelligence, which presses forward, and an unworthy timid ignorance obstructing our progress".

Thanks again to all.  

Report this comment
#60) On May 17, 2009 at 6:54 PM, binve (< 20) wrote:

IIcx, Thanks man! I will absolutely admit that I was too early with my call, but like with my postions, I got progressively more bearish as the rally continued (scaling into my postions). Because you are right, nobody can really call the top.

And I agree the trend is your friend, ... unless that trend is being lead by financials. Then the trend is a lit stick of dynamite ready to blow up in your hand :). But we have a lot of bearish signs that suggest we have seen the top of the rally last week. And I am perhaps wrong on that call too, but it desperately needs a correction.

Take care man, and thanks.

awallejr, Thanks for your thoughts man. I both agree and disagree with your statement. It is a timeframe dependent agreement :) My new post touches on indicators like this. First this rally needs a pullback to shake out the unhealthy participants. I expect the pullback (if it does indeed occur), to last 4-6 weeks. This puts us in place to get a preview for Q2. And if Q2 shapes up to be not quite as bad as Q1, then I agree the rally has a shot to continue (but ONLY if we get the needed pullback)

But longer term, I very much disagree. We will see lower because GDP has no fundamental reason to turn up. 70% of GDP is consumer spending, and the second mortage crisis wave hit in full force at the end of this year / next year. And this will dramatically affect consumer spending. The economy needs to make some serious changes for GDP to have any meaningful growth over the next several years. Thanks for the comments man!

sumbawa, These are exceptionally thoughful responses to myself and portefeuille. I think our views are similar but not quite in line with eachother, which is great, because that encourages better debate and questions than with someone who is diametrically opposed. But what I really appreciate is the way you state your opinions. Very clean and harmoniously. It is much appreciated. I am adding you as a fave, and you are welcome any time. Thanks!.

 

Report this comment
#61) On May 19, 2009 at 3:34 AM, portefeuille (99.78) wrote:

#52-54,56,59 That Siegel thing resurfaced again: see comment #15 of this post, especially the comments from "ed", "BenE" and "Namazu" I added ...

Report this comment
#62) On May 19, 2009 at 9:27 AM, binve (< 20) wrote:

portefeuille, Yep I agree. That seems like a very bad mistake that would be very easy to catch by anybody with a finance background who was doing some proofreading.

But it goes to show, newspapers are not always properly vetted, and sometimes scientific journals are not either. I tried finding a link, but could not. If you recall, about 5 years or so ago, there was a paper that was published (in Science I believe, it was a prestigious journal at any rate). The paper was a fake. It was written by two guys who had written a piece of software who a database of scientific sentences and the program strung them together and modified them so that it was readable. I remember reading the paper once it was discovered as a hoax, and it was non-sensical. But it obviously was approved by somebody to vetted or at least proofread it before it was published.

Sometimes wrong ideas get though :)

 

Report this comment
#63) On May 19, 2009 at 9:52 AM, portefeuille (99.78) wrote:

A professor of mine who is a referee for some physics journals used to tell me that 90% of the papers submitted to those journals were "uninteresting". But the problem was that there were no mistakes in them. All the calculations were okay and the reasoning did not have any Siegel-like flaws but there was "not very much new" in them and the new stuff was usually, well, uninteresting. So he often could not reject the papers. They were simply "uninteresting".

I guess a physicist "that is any good" would never submit anything that is "blatantly flawed" but economists appear to have no problem submitting almost anything to the Wall Street Journal (I know that the WSJ is not a scientific journal but it is at least one of the best known newspapers).

Report this comment
#64) On May 20, 2009 at 7:18 PM, TheGarcipian (88.38) wrote:

Binv,

Fantastic post, man. I've been away from CAPS for nearly a month due to all the business/pleasure travel since mid-April. Your post here is excellent. I've been wanting to write a piece similar, but then I found you'd already written all my thoughts down (sans the TA stuff). Your mind reading is getting exceptionally honed. Great work! Ten RECs for you (if only I could)!

--Gar

Report this comment
#65) On May 20, 2009 at 8:31 PM, binve (< 20) wrote:

TheGarcipian, Gar! My man, how have ya been! Thanks man, I really appreciate that! I am very glad you are safely back home (what with the pork chop death epidemic going around and such) :)

Thanks, I am glad I was able to voice this. It was a good one to write (it was a lot of fun), but I also tried to keep it on the facts (well, as much as I could :) ), not resorting to a lot of yelling and indigant statements. It was also a good TA exercise (so is my next post: More Thoughts and Analysis: Timeframes – Bearish, to Bullish, ...to Bearish, if you want to check that one out too). 

And I have been practicing on my mind reading, thanks for noticing :)

..Ten RECs for you (if only I could)!..

LOL! Well, if you could, I would gladly take them :)

Thanks man!.

Report this comment
#66) On June 03, 2009 at 8:28 PM, assafer (< 20) wrote:

Unbelivable.  Incredible, amazing and disgustingly great work.  This is an amazing assortment of bearishness that is without doubt true.  I'm astounded that we've climbed this high in the first place.  I thought my posts we're long, and time consuming!  Marvelous work, great post, and the best to you.   

I'm sure I speak for everyone when I say we would love to hear your views now that we're this high.  

                        May all your trades be prosperous, 

                                          Assafer

Report this comment
#67) On June 03, 2009 at 8:54 PM, atarigod (< 20) wrote:

Wow...this is amazing work. You should be getting paid for this type of work (and I hope you are!) Recs for sure.

Report this comment
#68) On June 04, 2009 at 12:47 AM, binve (< 20) wrote:

assafer, Wow thanks! Those are great compliments! LOL! especially the disgustingly great work :). Yes I am still very bearish on the fundamentals, even more so now. TastyLunch has a great post from Hussman where he reasons that much of the rally now is driven by economic conditions that were not as bad as when they were forecasted 3 months ago. I will concede that there is some amount of truth to that. But having economic forecasts that are super bad, and the reality turns out that the conditions are only really bad is no reason for a 43% rally.

I continue to be extremely bearish on the market because the fundamentals stink. The correction up started because we were at historically oversold conditions in March and bearish sentiment was at an all time high. Thats it.

The rally is continuing becasue money is leaving Treasuries big time and the US Dollar is tanking. If you look at the macro trends: The Market is up, gold is up, oil is up, the dollar is down and Treasuries are down. These markets are not well correlated during positive economic conditions. Which is precisely why the economy is not healthy and the market (IMO) is not forecasting an economic recovery. The rally is simply a reaction to big money being moved around in the international markets. That's all.

But after the consolidation in May, the market has decided it wants to go higher. But instead of lamenting it, I have decided to embrace it, since it give me an opportunity to re-short from higher levels. :)

Thank you very much for the comments! And I agree totally with your sentiments: May all your trades be prosperous also :)

atarigod. Thanks! I appreciate that! No, I get no payment for my work. Good discussion and recs are payment enough :).

Report this comment
#69) On October 21, 2009 at 1:12 PM, leohaas (92.12) wrote:

Just re-reading some old posts (mostly because the new posts are getting less informative, more political, and uglier--and I am seriously considering to give up reading CAPS completely).

My question: considering how thorough your analysis was, but that your trading account by now (S&P500 at 1100; you promised to go 100% short at S&P500 875) must be nearly depleted, can you explain what went wrong?

Report this comment
#70) On October 21, 2009 at 6:13 PM, binve (< 20) wrote:

leohaas,

Hey man, thanks for the question, and it is a fair one to ask.

Fundamentals:

In my opinion, worse now today than when I first wrote this post in May. I am now more bearish for the long tem than I was on equities. 

However, the mood was optimistic (and I was impropertly discounting that in May) but on the way to becoming more optimistic. And social mood can ignore fundamentals for a very long time (in this case about 8 months, and there is a chance that the rally is not over, but I think the risk now is to the downside, not the upside). But eventually reality catches up.

So I should have seen that coming, and been patient, and waited to short when the mood was positively euphoric, like it is now. Major changes occur when the sentiment is at extreme leves. People were extremely bearish on equities in March (perfect for a bottom) just like they are extremely bullish now (perfect for a top). 

Is this the top? Time will tell. But I think we are close, if we did not hit it today.

Technicals

You can see above, the pattern that I believed that would eventually unfold was a very large zigzag (5th chart in comment 1). This was going to play into the Head and Shoulders setup that started presenting itself in June. It obviously never materialized.

My Trading

And honestly I was faked out by it. No excuses.

So on July 15, when the H&S was broken and obvious it was not going to happen, I covered for a loss. I talked about that here: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=228843

The subsequent rallies I would play from the long side with a small portion of money (because I maintain that this rally is "fake" and a countertrend move, subject to and unexpected and abrupt end).

Mostly I would find the tops (in July, Aug, and Sept) and short those with tight stops. I have had pretty good success with that. And have been able to rebuild much of my trading account.

So I am short again now. Not all-in, but mostly in.

Is this "the TOP"? I don't know, and that is mostly an irrelevant question anyways. See my thoughts here: Whew! One Crazy week! However I Think Next Week Will Make Last Week Look Like a Walk in the Park :).

I am playing this like a top, but have given confirmation signals I want to see to confirm **if** this is the top.

So my plan is to continue to short tops (instead of buying the dips) with tight stops to protect profits, until we get a trend change. Then it willl be shorting tops all the way down the next large wave down.

Just my plan as it is currently. Hope that was useful. I also have a few mammoth posts that talk about my Long Term View on several asset classes, if you are interested.

Thanks, binve.

Report this comment
#71) On December 02, 2009 at 7:04 PM, 100ozRound (30.44) wrote:

Rec'd just because you made the top 5 all-time rec'd list

Report this comment
#72) On December 02, 2009 at 7:39 PM, binve (< 20) wrote:

100ozRound,  Thanks man!! :)..

Report this comment
#73) On December 15, 2010 at 10:58 PM, yuzhe123 wrote:

Ladies and gentlemen,=====www.kogoal.com=====      =====www.kogoal.com===== brand shoes,handbags,clothes,watches,caps,jeans,perfume,sunglasses,jackets,t-shirt,jersey,belts,purse,wallets,shawn,scarf,bikini,and so on.1)High quality. the tags and style code number are 100% correct.2) Safety. If the goods seized by our customs, we will resend them to you.3) Quick shipment. We have agreement with some International ExpressCorporation, the products will be shipped within 24 hours after we received your payment. And the parcel will reach your side in 4-7working days.4) Lowest price. We can give you the best price based on equal conditions in China.5) We are very serious seller, assure you that we can have very perfect cooperation.
We are willing to build mutual benefits and long term business relationships with all customersif there is any question of our products,pls don’t hesitate to contact me at your free time,we will try our best to help you.
credit first,Best severce,fast delivery,high quality 
=====www.kogoal.com=====      =====www.kogoal.com==== ,”’╭⌒╮⌒╮.’,”’,,’,.”,,’,”,.╱◥██◣”o’,”’,,’,.”.”,,’,.｜田｜田田│ ”,,’,.’,”’,,’,.”╬╬╬╬╬╬╬╬╬╬╬╬╬╬╬╬╬╬fd

Report this comment

Featured Broker Partners


Advertisement