We’ve had a hell of a run in the S&P 500. I would be putting hedges into your portfolio for a decline. One way to do so is with an ETF.
As always do your own research prior to making any investment/trading decisions.
SDS
A couple interludes to further my point…
I’m no permabull, in fact, I prefer finding names to short because I’m a realist. However we’ve been due for a correction and we’re now on the receiving end of one. The realist in me is saying that we have been successful in our attempts to inflate our way out of full-on depression. The realist in me also feels there are great opportunities in companies with balance sheets that exceed their current valuations, on a relative and real basis. True value opportunities mainly occur in the Spring of an economic cycle. Forget the ‘green shoots’ talk and focus on real valuations, which at this point, are the true golden children of the next three-six months. Embrace the Spring and heed the wisdom within the above interlude – I can’t think of a better man (Rocky) to provide it.
Oh, and please remember (though I know the vast majority never do nor will) that Nature tends to hit us in the Northeast with one final, surprise snowstorm before Spring is truly ushered in. Don’t be surprised if it happens soon… and you won’t be if you position yourself in proper risk/reward names.
Best of skill to all of you.
-ISYN
The S&P 500 has risen approximately 33% over the past two months. You should be protecting your portfolios from a pullback. I’m looking at TZA/BGZ which are ETFs focused on 3x the daily inverse of small cap and large cap stocks (respectively).
S&P 500
Do your own research prior to investing/trading in any of these names. All ideas expressed here are my own opinion and should not be relied upon or taken as investment advice. Also please recognize the high level of risk present in leveraged-financial instruments and small-to-micro-capitalization stocks.
A couple names I like here are MPEL (Macau gaming) and DXO (leveraged oil).
First, I believe oil is undervalued at this level. DXO offers an excellent way to have a leveraged-long position in oil. Crude went from ~$140+ to ~$36 very quickly following a path of $140 to $70, then $70 to $36. Those are essentially the inverse of two-100% moves… 100% of 100% is a level at which I’ve been told many significant moves end. I expect the main risk here is missing upside instead of losing on the downside.
Second, MPEL has recently come down hard and may be worth looking for the long side. This is something to think about.
Third, I made tons of green (%-wise) on the GBPUSD short and lost tons of green (%-wise) on the USDCAD short. The micro-fx experiment continues…
-ISYN
I believe we’re still headed higher – this looks like a healthy correction (Wed & Thu). I’d be buying this dip while paying close attention to the global political environment (Israel & Gaza, Russia & everyone, India & Pakistan & Fraud).
Also, oil’s come WAY off in one day – probably an exaggerated move… might be worth opening a long position today via DXO or short DTO.
Too many doomsayers out there still.
For your enjoyment…
Prior to making any investment/trading decisions be sure to do your own research. Assume I’m biased via direct or indirect ownership in all ideas mentioned.
A couple points:
These are some very basic, logic-based points of analysis. Sometimes simplicity serves an analysis best - I believe this is one of those times.
DIG has apparently found some support on a weekly basis in the mid-twenties.
********ISYN is now a proponent of DXO – for any long oil plays I would use this instead.********
Here’s a review of the trade idea I had posted last week. It looked like a triple bottom/inverse H&S pattern and as such I thought a long position may be in order… I was wrong in a big way as the GBP/USD has since declined to 1.4463. Seems to me that support has been broken.
Please click HERE to read the PDF file.
Do your own research prior to placing any trades and/or investments. Assume all posts here are biased through direct and/or indirect ownership.
I don’t normally look at currencies but this little doozy caught my attention today. From ISYN’s perspective this is a strictly technical trade which is not necessarily a great reason to initiate a position. The GBP/USD seems to be sporting the makings of a triple bottom / inverse head and shoulders using the daily time frame. May be worth going long here.
And a closer view with trendlines shows the pair has broken the 3-and 4-month resistance lines while possibly setting up a postive-trending channel… while I don’t put much stock into pure technical analysis I do see the value of reading charts to gauge sentiment flows (I’ll discuss my views on this in a later post). Obviously the GBP has found some support in the 1.47 range, if only on a temporary basis. The benefit of this particular opportunity is that you’ll have a fairly strong idea of whether you’re correct or otherwise rather quickly as the market’s support is clearly delineated.
I think we could all use a little bullish encore…
Don’t call it a comeback….
Been away for a while on vacation and since this site is a hobby and I earn zero money from it I thought I’d take a break from it as well. I’ve been watching this particular trade for a few weeks now and have discussed it with some friends who are in agreement – Treasuries are in full fear mode and will need to come back in. There’s two ways to play this via ETFs (TBT and TLT). See the charts below.
As always do your own research prior to investing in anything. Also always assume these posts are biased through direct and/or indirect ownership in the securities mentioned.
TLT has risen approximately 11% in 5 trading sessions. This ETF moves with the US long bonds. One potential trade is to short TLT which looks visually overextended. Some view the T-notes and bonds as a gauge of fear as their yields decline when fear rises causing a flight to quality, which we see here.
TLT
The second potential trade is to go long TBT which is an inverse ETF on the US long bonds.
TBT
Going with the prior post HERE regarding the World index and ISYN’s forecast for the remainder of 2008, this is a follow up on ISYN’s S&P 500 forecast which can be found reproduced below this posting…
Here’s a couple charts of the VIX & S&P 500.
Looks like we’re going to have some downside here for a little while – until we hit the 800-825 range which coincidentally we’re about 16 points away from right now. ISYN fully expects a very strong rally in December once we sell off to-or-near those lows again. I still stand by what I wrote on the world index posting and the posting below. Don’t fall in love with a trend or that love will blind you to its inevitable end.
__________________________________________________________________
FROM NOVEMBER 19th
The bears are coming up on some serious PAYBACK…
As admitted before, I was early on my bullish call by 10% or so. Even so I’m more bullish now than I’ve ever been. While I know it’s rare to see this I won’t change my forecast simply because it’s gotten to the point where it’s easier to do so. I made the bullish forecast statement and with an open mind I stand firm. There has been nothing new that would justify a change of my view. I’m going to lay out the reasoning in support of my decision again and as often as I have to to reaffirm my views.
While there’s plenty of trouble for the economy going forward I don’t see it causing the detriment of the financial markets. The main risks I see are the government screwing up or a Black Swan event. Other than that ISYN believes the game is about to be played and if you’re on the bench looking at the grass or the girls you’re going to miss some of the victory.
VIX
S&P 500
After discussing potential outcomes with a friend/animal trader I believe what you see in blue will happen through the conclusion of 2008 for this world index. Let’s face it – this game seems to be all about where the most risk lies and right now I suspect there’s more upside risk than downside. That being said there’s the chance of military conflicts in India/Pakistan as well as dozens of other potentially serious events which, if any occurred, would cause this playbook to go right out the window. Enjoy.
The bears should enjoy this sell off but don’t be too complacent… the bulls are just down the river loading up their choppers, ramping up to finish the year off strong.
I should probably clarify that this watch list is very unofficial and just a collaboration of names ISYN thinks are worth watching. While the returns from open to close are realistic what happens in between is not. For instance SKF and SRS nearly hit 300 prior to coming back down and becoming profitable. That means the watch list position would have been in the red by 75/share which ISYN would not actually allow to happen because cutting your losses is essential (mental and/or real stops). Take this list for what it is, a forum for idea generation. Enjoy your turkey and pie!
If only it were as simple as ABC…
Don’t lose sight of the bigger picture…. it’s easy to get caught up in the daily fear. Check out this S&P monthly chart, the same one I keep posting with updates. We are severely overextended on the downside here.
S&P 500 Monthly
We’ve got to push it to the limit… all Bulls on deck – prepare to fire
The bears are coming up on some serious PAYBACK…
As admitted before, I was early on my bullish call by 10% or so. Even so I’m more bullish now than I’ve ever been. While I know it’s rare to see this I won’t change my forecast simply because it’s gotten to the point where it’s easier to do so. I made the bullish forecast statement and with an open mind I stand firm. There has been nothing new that would justify a change of my view. I’m going to lay out the reasoning in support of my decision again and as often as I have to to reaffirm my views.
While there’s plenty of trouble for the economy going forward I don’t see it causing the detriment of the financial markets. The main risks I see are the government screwing up or a Black Swan event. Other than that ISYN believes the game is about to be played and if you’re on the bench looking at the grass or the girls you’re going to miss some of the victory.
VIX
S&P 500
A couple of things to consider.
I will remain bullish unless the S&P 500 breaks 800 on a monthly close. ISYN expects a long overdue rally… and a violent one at that. There is a strong possibility that we retest the lows again within the first six months of 2009 (assuming 2002/2003 lows are the actual lows). Some anecdotal evidence has begun to emerge as television shows have started discussing the stock market and weakening economy – not CNBC shows, but regular ones. Analysts are coming out with absurd predictions much like GS did with their $200 per barrel oil forecast when oil was around $135. When analysts start going to the extremes it’s a solid sign of an inevitable and imminent trend reversal. Added to this extremism is that hedge funds have begun to throw in the towel on 2008… see HERE to review a BBerg article. Executives are also beginning to snap up shares at a rapid pace…. see HERE for article. While that indicator has not yielded excellent results recently I expect it will reap positively over the next 6-12 months.
There are some potentially severe risks associated with long positions here. If the autos don’t receive some form of aid it will destroy the economy and plunge us into a much longer and deeper recession. The package doesn’t have to be a bailout but something does have to happen. There is also an increased risk of a terrorist attack as our new president transitions into office. This is the period when we seem to be most vulnerable as a government. Global political tensions have been increasing as well due in part to the faltering global economy. The main concern I have is with the event nobody’s considered yet… something out of right field… a Black Swan of sorts. Despite all of the uncertainty ISYN remains bullish until I see something to change my mind. I’ve only become bullish as of October 22, or 955 on the S&P 500. I was definitely a bit early.
Gio over at IBankCoin.com made a comment in his article “I Smell A Bull Trap” which got me to thinking. ISYN believes this is not a bull trap and here’s why:
I’m going to fast forward to Phases III and IV, Mania and Blow Off. New Paradigm was the whole “decoupling” belief that the world was no longer attached at the hip to the U.S. economic environment. Plain and simple they were quite wrong as we’re seeing still…. the global economy is slowing down and/or in a recession primarily due to events that began in the US. The subprime crisis hit and all the talking heads came out and said “Fear not! This shall be contained.” Hence the Denial stage as the market sold off and then rebounded Q407-Q108. During this time the majority of professionals began to believe it had been contained and things had returned to somewhat Normalcy following the selloff. The Bull Trap had been set. Then came the Fear as global economics and financial markets began to gain downward momentum on worse data and announcements. Credit markets seized up tighter and then came the Fall of 2008. September, October, and the beginning of November saw absolute Fear and Capitulation as hedge funds went bust or simply shut down to reopen next year. Redemptions ran rampant from mutual funds and hedge funds alike as hundreds of billions of dollars had been pulled out the financial markets for the short term (it’s going to come back in eventually and it’s going to have to chase the bulls up). ISYN believes we’re in the Despair phase as individual investors, 401k participants, wealth managers, hedge fund managers, and mutual fund managers have lost all trust in the markets. This is ESSENTIAL to the bottoming process. The goal is to start accumulating assets when everyone else is simply disgusted with them. Buy low, sell high ring a bell? From my own experiences I’ve been hearing stories of clients who “just don’t want to deal with it anymore” and want to go to cash for six months. They’ve given up. They’ve essentially thrown up their hands and quit for the time being – that is the essence of desperation. When everyone’s been doing the same thing for a relatively long time (whether by time periods or severity) you should do the opposite. This holds especially true in the financial markets.
Here are a couple comments debating this idea and ISYN’s response – figured I’d keep the conversation going.
The big banks got TARPed $25B each, and since then they’ve lost 30%-60% of their value in less than two months. That’s important because the rapid selloff comes so late in the crisis and AFTER so much monetary and fiscal intervention. While it does have a capitulatory feel to it, the only reason I can imagine why investors would take them down this hard so late in the crisis and after a big injection of capital by the government is they’ve learned about some some new, very nasty shit that needs discounted. I don’t know what the nasty shit is that they’ve suddenly decided to discount over the past few weeks, but I’d bet a hamburger that whatever it is will cause the banks to keep their sphincters tight and continue to restrain lending.
Also, per the Merrill Lynch High Yield index, option adjusted high yield credit sreads are an unbelievably high +1600. While down a few basis points from their all time highs this past October, they are way wider than the previous peaks of about +1100 that were reached during the 1990 LBO bust and the tech bust equity low in Oct. ‘02. So, the point is that at +1600, the high yield new issuance market is effecitvely closed and will remain closed until spreads tighten to levels where it is economically viable for issuers to come to market. That won’t happen until actual defaults spike and begin to approach levels implied by current pricing in the high yield market.
The bottom line is that IMO, you can’t get a new bull without robust credit creation and the action in the banks and the high yield new issuance market suggest to me that is still many months away. We may have a decent rally for a few weeks or even a couple of months after today’s round of profit taking, but I’d bet a cheeseburger we make another trip down to at least test the lows again.
Sorry for the long post.
Solid points and well taken.
SmallDog (yes I’m too lazy to type your stated name even though I’m selectively lazy and willing to type out this entire sentence explaining it), you’re correct on the credit markets. They are the economy’s blood and without blood the body stops working/growing. However there has been such massive global stimulus (blood transfusions) that I suspect while it may take a little bit of time to flood the global economy (veins) with this blood, it is certainly making its way through the system, albeit at a trickle a minute. Odds of us retesting after the new year? Pretty good, but in terms of a several week to several month rally I’m convinced. Especially since it’s the inflection points where the most efficient money is made and everyone I speak to or know of that doesn’t daytrade is terrified and sick and tired of this market – they’ve all but given up and many have given up.
Gio – I view the chart as emotionally proportional regardless of size and scope of various Phases. It’s not drawn to scale but rather represents sentiment flows over time that follow that pattern whether it be a very short term thing (think of Crocs or any other fad) or the longer term stock market. As such I base my views of our progress along the curve on the emotional flows in the market and not on relative time or nominal changes in value. It’s as subjective as it gets but that’s the beauty of inefficient markets – if you figure out the change in sentiment before others you’ll recognize the benefit of their chasing to catch up. I measure the flows based on personal anecdotes in everyday life. Hope that made some kind of sense.
Yesterday the S&P 500 held the line it needed to on a technical basis (850). This was key for those that follow tech analysis and could represent the temporary shifting of fear back to greed. The 4th quarter is typically a good one for stocks (excluding October) and I expect the market is looking for some relief following the drastic declines from the past 2.5 months. Below is a chart showing the S&P 500 holding the 850 line.
Also, refer back to THIS POST to examine ISYN’s expected November outcomes….
Here’s a graphic from that post showing what has become an increasingly probably scenario. Pay closer attention to the bottom of the graphic where it shows ISYN’s expected November outcome on the candles.
On a side note, due to my lack of knowledge with blogs if you’d like to be updated with new posts please email GrandSynergy@gmail.com.
Bears were correct up until today when we nearly broached 800 on the S&P…. that’s the 2003 resistance level which I consider to be the bottom for this market going forward. It would seem people jumped ahead of hitting 800 in anticipation and caused an abrupt about-face to the north. Here is a visual rendering of what occurred to bears at that point in time, then again as the market rallied after a fade.
One of the best mantras I’ve heard is “it’s not the size of the dog in the fight, it’s the size of the fight in the dog”. Hence I introduce to those of you who have yet to hear the 3x Leverage Small Cap ETF (TNA). Very new on the scene this puppy is a volatile name that tracks, on a daily basis, three times the performance of the Russell 2000. If you expect a rally in this market TNA is not a bad place to be.
Do your own research and never make investments/trades based on what you read on ISYN. Always assume I’m biased on a direct or indirect basis.
I’m betting these fellas could use some TNA…
Just a follow up on yesterday’s post…
Here’s the S&P 500
Here’s the VIX and the line’s been broken
This is going to be a defining couple of days. If the market closes down below 850 we’re in for some trouble. Market wants to bounce but the problem is there’s a ton of money on the sidelines waiting for 2009 to re-open funds and reapply capital, etc. Why maintain a highwater mark instead of starting fresh? Integrity? What’s that?
1: S&P declines further on a bankruptcy or something unexpected – max downside approximately 10%.
S&P 500
Despite mounting pressure to subscribe to the alternate view I’m still bullish through Thanksgiving. Nothing has given me reason enough to believe market sentiment will flow to the downside in November after so much brutality in October.
VIX chart below is breaking through/coming up against resistance. ISYN expects one of two things: a slingshot higher or a breakdown resulting in a rally. I’m leaning more toward a breakdown even if it closes above resistance. This should result from positive sentiment flow in the equity market. If you’re going to be long to Thanksgiving now is a good time to enter/add to a position. However due to the situation I would include a hedge… new triple leveraged ETFs are out which could service that need. Check out BGZ (Direxion Large Cap Bearish ETF).
Look to GM for a bailout – if it happens the market will rally. The amount of job losses from a GM bankruptcy would be a massive negative for an already struggling economy.
-ISYN
VIX is coming up against strong resistance after two days of intense selling pressure (see chart below). This is a strong bearish pattern with three spikes higher, each on successively more of an increase above the prior with a sharp sell off followed by the retest of the moving average as resistance. It’s highly doubtful that the market sentiment will become so negative tomorrow that the VIX two day trend will continue further. IF the employment number is horrendous expect to see significant resistance in the 70 area although I don’t believe we’ll break through our current moving average resistance. The sell off was healthy seeing as how we’d rallied ~18% in six trading sessions prior to it. Feeling very confident even with jobs number coming out tomorrow – so much hype over it already.
VIX
This is what the bears have to look forward to tomorrow…
This is not the sort of beginning to a rally following a double bottom characterized by a rapid slap in the face correction. This is one significant rally followed by several days of clawing higher incrementally. This is the real deal people… ISYN would be staying long (holding stocks) to Thanksgiving from here. Check out ISYN’s watch list a post or two the right of this one for some of the names that interest us.
S&P 500
If the bulls angry and motivated stay out of it’s way…. or you bears will lose your pants like this guy
There’s no point in my talking to the Democrats right now because they’re all awash in the sweetness of a probable victory. However you Republicans should understand that there is a potential silver lining that comes with this victory.
Typically the stock market has averaged twice the gains during Democrat presidencies versus Republican presidencies (this excludes Hoover). Check THIS OUT to see a visual chart.
While I typically lean a bit toward the conservative side ISYN always enjoy good, solid stock market returns.
Assuming the website I used is correct (click HERE to see) this is a very interesting piece of information. If one were to buy the S&P 500 index beginning in November 1929 and hold through February 1930 you would have earned a 57% annualized return, or very approximately 15% total.
This happened as you know directly after the crash. We did not have, as a nation or world, the ability to produce a concerted effort to buoy the markets and provide stability. Now if we consider the trillions of dollars that have been pumped into the global economy by several nations to keep things afloat we may consider the 20%+ month of October to be a significant decline – even with the severity of the current issues. As this market has continued to hold a low of 850 over the past few days and without experiencing any vicious declines, I’m more confident than ever in a year-end rally. Factors that continue to provide confidence:
VIX
S&P 500
Get jacked for Monday…
Welcome to the Rally baby…. if this market held up as well as it did today then we are locked, cocked, and ready to go higher. S&P 500 chart below.
VIX
Taleb & Doomsday
Courtesy of the following post by ‘Green Writer‘ here is an interview with Nassim Taleb, author of The Black Swan.
http://www.pbs.org/newshour/video/module.html?mod=0&pkg=21102008&seg=5
It’s a fairly doomsday projection – I figured I should show the other side.
Boondock Saints: How Righteous This Rally Shall Be
A Message To The Bears
-ISYN
My original bullish postings can be found HERE and HERE. I’ve been officially bearish since Fall of 2007 and only this week have I changed to the bull camp.
This is a chart of the VIX in previous market bottoming processes. We’ve peaked above all peaks since 1991. Read the chart and it essentially explains itself – this is a great time to buy.
VIX
-ISYN
ELN UPDATE: Market apparently does not like outlook for the company. I’m sticking with it – long idea still valid as spec play.
ELN
ELN earnings came out and the market seems to like what they saw. Current bid @ 8:20am is showing 8.18 per share or $0.36 above yesterday’s close of $7.82. This of course is WAY below the price of $9.08 ISYN decided to watch at for the earnings play. Fair enough. With the growth in Tysabri sales to $237mm in in-market sales globally ISYN still believes there is some value in a longer term holding (albeit as a minor position and a purely speculative drug play).
YHOO
ISYN still likes this and believes you won’t be punished for holding this six months out. Could be wrong but we think we’re right. If YHOO received a new offer that was lowered from $33 to half that ($16 or so) – you’re still making bank.
GU
No legitimate updates except a new variable has been thrown into the mix. I have yet to be able to confirm or deny this rumor but there’s discussion of fraudulent accounting practices with GU – mainly in terms of their input cost of vegetable oil. Apparently (and again, I haven’t seen the article yet) a reporter in China wrote up an article stating that the company has been lying. I’ll let you know when I know.
Looks like another tough start for the market today. ISYN stands behind the article it wrote yesterday about exposing yourself to the market here and now. We may be early but with an S&P that is now discounted ~40% from it’s peak (it was around 34-35% when ISYN published the article) we believe now is the time to start accumulating solid companies with strong cash positions and operating cash flow. You have to be selective.
-ISYN
For the time being it may be prudent to expose yourself to the long side of the market. The incredible correction and volatility the market has enjoyed these past few weeks has been nothing short of mind-numbing, heart attack-causing, hair-loss catalyst action. Just look at the following chart of the S&P 500 while bearing in mind the VIX closed at 53 and change from a peak of 80 or so.
Mean Reversion
An investor who bought an S&P 500 index fund in 1998 would barely have seen a return over the past decade…. we’re talking less than 1% per annum on average – you would’ve been better off investing in CDs!!!
S&P 500: Decade of Nothingness
Now I’m a fan of the concept of mean reversion. I even developed an intraday indicator based on the concept. Over the last thirty years or so the approximate average compound annual return of investing in an index was 12%. Thus one could conclude that earning a return of next to nothing for the past decade or so is a sign of one of two things: either we enter a long, drawn out bear market which brings us to a 5,000 Dow Jones Industrial Average or we revert back to the mean and see significant price appreciation in the equity markets. I’m a believer of the latter viewpoint.
Understand The Risk
ISYN expects a rally but respects the potential for a crash. The current financial crisis was not a Black Swan because it was predicted and expected. If there was ever a time for a Black Swan event it’s now to within six months. Life’s irony dictates that things happen when you least expect them and as this market learns how to walk again don’t be surprised if it gets knocked down a couple times. This is fine – capitalism is not over and the equity markets will continue to march higher. Every generation has the doom sayers who prance around screaming that the world is ending because of an oil shock, or a world war, or a food shortage, etc. If you want an asset class with high potential for growth over the next ten years – look no further than equities.
Put Me In Coach!
There is currently an enormous quantity of money on the sidelines that will soon be yelling “Put me in Coach! I’m ready to play!” Read HERE and HERE for figures – but we’re talking in the hundreds of billions of dollars. This is what happens at market bottoms…. everyone becomes terrified and pulls their investments into cash positions. Then they chase the market back up.
Overview of ISYN’s Argument
Either way the equity markets should be around in twenty years and should be much higher than today. I’d find some companies with mega quantities of cash relative to debt in semi-strong forward-looking industries and snap them up. If you read my prior posts I’ve highlighted a couple such as YHOO and GU. Check back shortly for some more ideas.
-ISYN
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vJRGEwtqBFQM.asf
This article was originally published HERE on January 04, 2008.
“Ad augusta per angusta” [to high places by narrow roads]… it seems as though our Latin predecessors were seeking alpha as well!
2008 is shaping up to be a difficult market to navigate for individuals as well as professionals. The croupier is about to spin the roulette wheel and wealth managers are placing their bets. Will the ball land on red (recession) or black (progression)? Let’s examine a core-strategy for red. This is intended to make suggestions on a few key areas which should not be ignored, not as a design for an entire portfolio.
As a certain Wesley Snipes explained to us in the movie Passenger 57, we should “always bet on black”. Unfortunately for investors, employees and business owners across this nation Mr. Snipes is incorrect in this regard. The economy is incapable of consistently remaining in the black. There are always recessionary periods that lie in wait for the country to overextend itself by developing a bubble (see definition below). So how would one prepare their portfolios for a potential recession? Below are a few plays you can make to protect or grow your portfolio in 2008, assuming the economy declines further.
Pick up the UltraShort S&P500 ProShares ETF (SDS). The companies that the S&P 500 consists of are the pulse of the United States of America’s economy. While this ETF does not short the economy, it does bet on a decline in the stock prices of those companies that make up a strong portion of the economy. In my opinion, the market players have yet to factor the negatives of our current economic state into the S&P 500. If we enter a recession it’s a fairly safe bet that this ETF will outperform many of your other positions.
Pick up high-quality, high-potential healthcare stocks. Seek out stocks whose companies have a good balance between a current product base and a strong product impact potential [PIP]. An example would be Company X having $500 million in annual sales from 2 existing products and another product in Phase III testing which has sales potential of $50 million per annum (10% of sales). Here the company is already on solid footing (patents, etc. assumed valid for years to come) but can achieve a significantly higher stock valuation if Phase III completes successfully. If a healthcare company provides something people require and don’t simply need, they’re a pretty safe bet during an economic downturn. You’ll have to do your own research on this one.
Finally stay away from retail and consumer discretionary. The American consumer will probably not be able to sustain its current strength following the one-two punch of a depressed housing market and inflation’s rise (commodity prices are soaring from already-elevated levels).
DEFINITION: A Bubble, in economic terms, occurs in two phases. Phase one, the seed of a bubble, is when demand outstrips supply and causes prices to rise. Phase two, the actual bubble formation, is when supply proceeds to surpass demand yet prices continue to rise. Phase two can continue for months or years. It creates an illogical economic environment which in time will correct itself through mild or severe contraction.
This Bloomberg article details the fact that the earnings consensus for Q308 among analysts remains at an all-time high despite all of the economic hindrances. The current estimate for aggregate earnings of S&P 500 companies is $241 billion, the most ever. According to estimates compiled by Bloomberg these companies will show an increase in operating profit of 28% following a decline of 7.5% in Q208. This would exceed the record amount attained in Q207, prior to when the subprime crisis erupted – sounds a bit unrealistic, no?
It has been and continues to be my opinion that the next shoe to drop will be the actual corporate earning power which has yet to be a focus for analysts. The banking crisis has maintained the spotlight for the past twelve months and now, as we pump money into the system to unfreeze it, we can return our sights to the standard concern.
Expect earnings to drastically underperform relative to expectations. The one bright side is that equities remain undervalued as it currently stands. The question you should ask yourself is whether or not you believe the current undervaluations experienced throughout the stock market are discounted enough to factor in any negative earnings surprises. If your answer is no, as mine is (especially after today’s rally), then prepare to raise cash and/or put on some short positions.
Here is today’s action. We’ve been overdue for a bounce and this is going to be one heck of a short term rally, as witnessed today. Expect a strong sell off to arrive within 5-10 days. This sort of straight up move is unsustainable, especially if you’re of a similar earnings thought process as I am.
3-month view of the S&P 500
-ISYN
This rally is a reaction to a state-of-market (oversold) and not to any fundamental change in the environment. Folks – putting a 5 foot wall up on the shore is not going to prevent a tsunami from flooding your house. It will only delay the inevitable. The sheer size of the issues at hand require more respect than is being given. These are extremely slow-moving areas of trouble and they take months to permeate the economic system, especially now that the system is a truly global one. We are in the eye of the hurricane – make no mistake. The second wind of it may cause less damage but it will be severe nonetheless.
Retail sales will be horrendous, I repeat, horrendous, this Christmas season. Home heating bills are going to cause immense sticker shock and Santa’s bag will be light (stingy old bastard). Corporate earnings expectations have yet to take into account the following things:
1- Home heating costs
2- Massive economic loss of high-income jobs from finance
3- Continued inaccessibility and/or tightening of credit
4- Global economic slowdown
Prepare to view the following have their heads chopped off after this 5-10% unsustainable rally fails: Retail (Fall – Winter 2008), Commercial RE (more so in 2009), and Tech.
We’ve been oversold to extreme levels as per the Vix and most other oversold indicators out there. However we’re oversold for extreme fundamental reasons so any large rally, such as today’s, should be faded or used as an opportunity to put on more short positions.
-ISYN
