I received an email from a friend this week, which outlined all the technical reasons as to why the Nasdaq 100, the leader of the current bull market, looks weak and could correct on the downside. I agreed with him. Now, before I continue - it is worth stating that my personal opinion on technical analysis is iffy at best. Having said that, if used correctly in conjunction with fundamentals, sentiment and a variety of other indicators, charts definitely have their place in an investor's tool box (and on my blog).
Chart 1: Nasdaq is suffering from a loss of momentum...
Source: Objective Trader
The email included a chart, shown above, which entertains the idea that the technology sector is suffering from a loss of bullish momentum. Firstly, it is worth noting that the price itself seems to be in the process of printing a first lower high. Moreover, all types of technical indicators are negatively diverging from the price right now, as my technician friend stated. Both of these technical signals could be indicating lower prices are ahead.
Furthermore, let us not forget that the Nasdaq 100 has achieved superb gains out of the March 2009 lows (over 180%) and has lead the way in the current four year bull market. Therefore, to see a leading sector fail in its new bull market high confirmation, should be a worrying sign.
Chart 2: ... and could be ready for a bear market correction!
Source: Short Side of Long
Moving away from all the technical indicators and just focusing on the price itself, one could assume that eventually the Nasdaq is up for a major correction. While the tough part would be to pin point the exact top (as it always is), it is interesting that the Nasdaq 100 has not suffered a negative annual return for four years now. The longer this phenomena goes on, the stronger the mean reversion and correction will eventually be. After all, cyclical bull markets do not last forever.
Looking at the chart above, major corrections and bear markets have usually occurred as prices break major uptrends. This occurred in 2000, 2008 and could be occurring once again in the not so distant future. If the technical indicators above are right (and that remains to be seen), the Nasdaq could complete a triple top around these levels (some like to call it a head & shoulders) and break below the uptrend line - entering a bear market.
Chart 3: Advisors are recommending EXTREME net long exposure
Source: SentimenTrader
What I find even more intriguing than all the technical mumbo jumbo I just wrote about, is that just about everyone is not expecting the outcome laid out in this post. Mark Hulbert runs a great service called Financial Digest, which tracks the opinions and recommendations of various newsletter advisors for the Nasdaq. Just like any other contrarian indicator, when the Hulbert Nasdaq Sentiment shows the majority of "gurus" holding net short exposure it usually means its the time to buy and visa versa. Chart 3 shows that the current readings were above 90% net long exposure, which is one of the most bullish readings since March 2000 (the month the Tech Stock bubble burst). With just about everyone positioning themselves for higher prices, what could possibly go wrong? It is truly rare to find anyone out there expecting a bear market, that is for sure.
Chart 4: Retail investor cash levels are very low...
Source: Short Side of Long
In general, I have been concerned about the profit margins and corporate earnings of the overall US market since August of last year, but so far the market is still not concerned. But I am slowly noticing that what I envisioned coming is also becoming more and more obvious to other smart investors. I was recently reading a Bloomberg article, where a great investor by the name of David Einhorn started cutting longs and increasing shorts as the markets rally euphorically during an anaemic economy and stalling earnings growth. He too must think we are becoming quite overvalued right here.
Chart 5: ...while retail inflows into equity funds are very high!
Source: Short Side of Long
Obviously there are many great investors who still remain bullish as well, but I tend to believe they are siding with the wall of retail hot money that is currently chasing the stock market higher. In general, it is almost always better not to side with the retail crowd, as this group of investors has awful timing and a poor decision making process. Therefore, looking at the ongoing very low cash levels (Chart 4) and recent very high inflows into equities (Chart 5), I continue to remain bearish on equities in general. I assume that when something goes wrong in the not so distant future, these same retail investors will be the first to liquidate.
Source: Short Side of Long
Source: Short Side of Long
Also on my radar is an interesting development in the overall Risk On trade. Infamous poster boys of the risky assets tend to be Copper and Aussie Dollar, with a prime link towards the Chinese economic activity. The fact that neither of these assets have made new highs since at least middle of 2011 should be very concerning. It also tells us that not all is well in China, despite the constant blabbering on various media outlets on how China is booming. Also, consider the fact that both of these assets (Copper and Aussie Dollar) remain in a very tight trading range for several months now. In other words, a break in either direction of these assets could be a major decision for the overall market conditions. While we should let the price decide the next direction, personally I would not be surprised to see a breakdown.
The Bottom Line
Nasdaq is not confirming the broader US index, as it suffers from the loss of momentum and displays a variety of technical divergence signals. The fact that this sector lead the bull market for almost 4 years could be a signal that we are switching over into an eventual downtrend. Sentiment on tech stocks remains EXTREMELY bullish and on parallel with the Tech mania. Finally, Nasdaq is not the only risky asset displaying non-conformations, with Copper and the Aussie struggling to advance for several months now.
Nasdaq is not confirming the broader US index, as it suffers from the loss of momentum and displays a variety of technical divergence signals. The fact that this sector lead the bull market for almost 4 years could be a signal that we are switching over into an eventual downtrend. Sentiment on tech stocks remains EXTREMELY bullish and on parallel with the Tech mania. Finally, Nasdaq is not the only risky asset displaying non-conformations, with Copper and the Aussie struggling to advance for several months now.
What I Am Watching
Anyone harboring doubts about whether the market is topping should take a look at a chart of the Transportation Index:now if that's not a vertical unsustainable rise...I am looking at buying more puts as the topping process progresses,before moving to outright shorting via futures once the decline is confirmed(it seems to me we are very very close,but of course I've already been unfruitfully waiting for quite some time...).I am particularly bearish on the capital goods industry,as during a boom the majority of malinvestments occurs in higher order goods/higher stages of production.Home builders are a wonderful example:old Ben has managed to reflate the burst housing bubble to a quite astonishing level.Kudos to him!
ReplyDeleteNerdy note:the production stage that is usually most neglected during a boom is the middle one.Hence it may offer good investment opportunities after the bubble has burst,as the readjustment process must inevitably divert funds away from the higher and to a lesser extent lower stages and into the middle one.
Re copper:I am actively looking at shorting it,most likely on a convincing break of 3.50$.
There currently is a large amount of retail money in the market and I suspect it's there in the hope of front-running the Chinese "recovery"...Well,I'll just say there certainly is room for disappointment,to put it mildly.
If the recent monetary tightening there is for real,then watch out below...
In any case,even if they were to inflate even more,that would hardly be a cause for celebrating,as it would simply mean that the inevitable breaking point is closer than before:China has already taken much inflationary abuse.
By the way,emerging economies can only suffer much less monetary abuse before breaking down than developed ones,as market forces there are less capable of counteracting it and the pool of real funding is way smaller.
Re gold:I am delighted to see that the last inflow in GLD was on the 7th of February and that the ounces held in trust are pretty much the same they were in mid-August of last year(roughly a <10% decline from the December peak):a perfect round trip.This confirms that people are scared of PMs and taking money out whether they rise or decline.It has become an automatic response:they simply can't take it anymore.I suspect today will prove no different.
Moreover PMs are now clearly negatively correlated to stocks:a welcome development that should bode well for the next 1/2 years.
This interesting chart also reinforces my belief that metals are way better then miners:
http://www.acting-man.com/blog/media/2013/02/gold_bgmi_ratio_long.png
Miners are very very cheap right now,but the trend we're seeing is perfectly in line with what happened during the last bull market:if people want gold,they buy gold,not miners.As I've opined before,reservation demand for money drives all bull markets in gold and this one is no exception and miners cannot fulfill the same role gold fulfills for its owners,hence they are bound to get cheaper and cheaper as the bull market progresses(and the reasons for owning gold become more and more pressing).
That said,they might provide valid trading opportunities, particularly at this juncture,given how oversold they are.But I would not bet on their long-term out-performance.
Of course this long rambling is also partly a way to kill boredom while waiting for things to play out...I am gathering dust in front of my computer!
I think you are right, and I read a report that never before have brokers seen a shortage of money in tradres accounts. its been a rough and tumble few years for traders, and I am sure you know what I mean.
DeleteThe guys from http://sentiment-trader.blogspot.com are guys I watch, and he has amazing calls, and a blog you need to check out, as his call for the last run up starting in NOV 2012, was spot on. He is now saying that the next few months are not going to be good for the markets at all.
I think this market is going to trick many traders into doing stuff they wouldnt normally do, but that is its job anyway, i am sure you agree.
Seasonnal gold price show that rally to start in july and august. Business as usual. Cotton could be a more profitable bet.
ReplyDeleteI think there should be at least a small rally prior to July.. otherwise the technicals just wont look right..
DeleteOne old adage that applies to stock market is sell in may and go away.
DeleteClimate changes and u make in march things you usually do in may : )
DeleteIm keeping it very simple, but just look at the charts of Apple and TRAN, can you see anything that looks similar? I'd be ready for another round of selling soon.
ReplyDeletehttp://www.rankia.com/blog/Alloverthemarkets/1694615-dow-jones-transportation-average-prepara-para-caida-importante
The Rothbardian Investor - always great comments to read from you. I really appreciate another point of view. I also prefer to own the commodities instead of the company producers, in this case the Gold Miners. Whenever miners get beaten down and extremely oversold, for me it is just another signal to add more longs towards Gold and even more so towards Silver. I also owe you an answer from the previous post so here it is: Regarding Milan, I have been following them since I was 5 or 6 years old. Even though I'm an Australian I was born in Europe and some of my family lives in Milan, so naturally football is huge there (unlike in Australia). One thing that I do not admire about Milan is its president, but one has to admit that when Silvio bought the club in 1986 he saved it from ruin and returned it its full glory in 1990s. However, that was long time ago and Silvio does not seem to have the same golden touch anymore.
ReplyDeleteThank you!I really like your blog:it's always very interesting to read and it allows for intelligent discussion,without the hype and bugaboos generally found in other venues.
DeleteI hope to contribute some value to you and your readers by sharing the fact that I am very bearish on Royal Bank of Canada,Canadian Imperial Bank of Commerce and Bank of Nova Scotia(in order of perceived "crappiness").I am looking at buying long-term puts on them.
Of course I do not expect you or your readers to blindly jump in the trade because I said so.I just want to share the trade idea and say that in my opinion these banks are worth looking at(as is the whole supposedly safe Canadian banking sector),as they may present some profit opportunities.
Re Silvio:can't really fault the man for forgetting about Milan,these days he's busy trying to steer clear of jail,whilst enjoying his parties ;)!Hope your family manages to avoid the fallout from the European/Italian economic crisis then!
I share your view of Canadian banks, I exited my long term positions this week. The most interesting developement is China Financials. Bearish positions could provide good torque in the portfolio and well suited to adverse market conditions. Many catalysts to come and Technical bearish signals have emerged.
DeleteHowever, I can`t rebalance to market neutral, since I`m puzzled on the long side, even though US banks are cheap (BAC) and in a secular upward move.
Any idea ???
Happy Trading.
gd
Thank you for those thoughts regarding Canadian banks. The only position I hold right now is shorting Loonie as declared back in very late August of 2012.
DeleteI've been a fan of this blog for some time, and find that most commentors add value too. I have a question for the Rothbardian Investor about the Canadian banks, particularly Scotia Bank. I bought a long position in them a couple years ago, mostly because of their large exposure to non-North America markets. So I was suprised to see you include them on your bearish bank calls. I would love any further analysis or info you can share that might help me decide whether to dump my shares or hold on. For what it's worth, I am a long term investor, haven't ever tried to do any options trading, and as stated at the beginning, very new to the job of managing my own investments. So, thanks in advance for any advice.
DeleteThe best reply I can give you is to dedicate as much time as you can to learning how to invest and doing your own analysis.There are plenty of ways and styles to make(or lose)money in the markets.
DeleteMore specifically,I believe that Canada is in the last stages of a massive real estate bubble.So it makes sense to me to get short their banks,particularly considering that they're at or near all-time highs at a time when it appears that a global bear market is approaching.
I have picked those three banks because they have large mortgage books,a meaningful percentage of which is not insured by the state(i.e. the banks bear 100% of the risk of default)
Moreover,they sport elevated leverage and are generously valued by the markets.
As always Tiho, love the research and particularly your contrarian point of view. I keep my blog reading to 5 or so blogs to keep from too much information and BS, but yours always remains on my list. Keep it up!
ReplyDeleteVery nice compliment. I try and cunt the bullshit as much as possible. Simple and straight to the point. Investors either agree or disagree and that is that.
DeleteTiho are you old enough too remember that great Milan side of the late 80s early 90s? Phil
ReplyDeleteHow about the great Inter and Napoli sides that they had to play against...a great era
DeleteLuckily, I was just old enough. I watched great players like Van Basten, Rijkaard, Gulit, Rossi, Maldini, Costacurta, Boban, Savicevic, Desailly and many others play amazing football. My favourite game was Champions Lge final in 1994 when Milan beat Barca 4-0, even thought Romario (my fab player at the time) was on the opposing team. That was Truely a great era of football.
DeleteThanks, Tiho. Apanalis. North Spain.
ReplyDeleteHi Tiho and hi all...
ReplyDeleteI changed my Avatar and decided to start a Fan Club ;-). Tiho, you know how to reach me if you have an issue with too many women wanting your autograph now that I'm spreading the word for you. I'll make sure they only throw their undergarments at you. Face it, you're the Jim Morrison of the Markets. LOL.
Here's what I'm watching...
http://on.wsj.com/15V1TAT
I have been also keeping an eye open on the currencies. AUS and CDN dollars are on the fall.
It has moved really fast in the last couple of days/week. We are at a place where I feel that if they don't hold,
we are in for a fall. I just have to say... interesting times, that's for sure. I can't believe that the USD
is still holding on.
I'm watching the 50 DMA on the SPX. Wondering when to add to my small short position.
Later,
Mitch
Hahaha! Thank you for your thoughts Mitch, they are always appreciated. Canadian Dollar has broken down in recent weeks, but Aussie and Nasdaq are yet to follow. Also Copper looks and acts very weak!
Delete