Business Magazine

Thrilling Thursday – Topping Or Popping?

Posted on the 07 July 2011 by Phil's Stock World @philstockworld
Is it time to turn bullish? We went back to mostly cash (still bullish in our long-term positions) last Friday (see "Stop the Rally, We Want to Get Off!") and the markets have gone up like a rocket since then.  Sometimes I feel like I am the only person who remembers 1999, or 2008 or May while everyone else just jumps on the momentum bandwagon to go along for whatever ride is in play for that day.  Sure we do plenty of momentum trading ourselves – but that’s not investing – it’s gambling and never let yourself be fooled into thinking otherwise.    Even the people who interview me ask the dumbest questions – totally focused on the moment with no big picture perspective at all.  I suppose it’s all encouraged by the superficial nonsense that passes for news on TV and the WSJ is becoming a comic book too but the Financial Times and the New York Times still write actual stories if you take more than 60 seconds to get past the headlines.  Things are neither fixed or broken in minutes – or days for that matter.  Just because the markets CAN move up or down 5% in a week, doesn’t mean that they should and it certainly doesn’t mean the VALUE of the stocks has moved up or down 5%.  Do they companies suddenly make 5% more or less profits than the week before?  Do the companies make 5% more or less sales?  No – it’s all conjecture and extrapolation taken to a manic-depressive extreme driven by a 24-hour news cycle that needs to pump the greed and fear machine to keep you watching and reading and most of all – TRADING – because panicking you in and out of positions on a daily basis is making the brokers record profits and a return to buy and hold by investors would wreck their business model.  What did we talk about just yesterday?  95% of the day’s trading activity is TradeBots and Day Traders.  The lunatics have truly taken over the asylum if that’s the case when you are looking at a market that is 95% MANIPULATION and just 5% VALUATION.  Manipulation works great in the short run but, in the long run – valuation is real and it gets realized – one way or the other.  For example, on Thursday, April 22nd, I titled my post "How to Make 500% on the Next Crash."  I was a week early then as well and the Dow climbed from 12,500 to 12,800 over the next 5 days but, by June expiration day (20th), it was back to 12,000 and ALL of our 500% plays paid off in full – but not for the people who panicked out because the market moved 2.5% against them that first week.  I haven’t even written a Disaster Hedge post for July but already people are panicking out of short positions!    Of course if people scale into positions sensibly, you wouldn’t be panicking in the first place because you would simply put another 1/4-1/3 of your allocation in at the first 20% loss and another 1/3-1/2 at the next 20% loss and you’d average into a full position at a significantly better price than you started out and, more importantly, over a significantly longer period of time because fundamental valuations need time to reveal themselves.  As with last Thursday, when we moved back to cash and went short – on April 21st it was a pre-holiday weekend (Easter) and we didn’t know what would happen the next week and, as with the week after April 21st – we’re having a low-volume rally – so far….On Monday, May 2nd we got the "great" news that we killed Bin Laden and I pointed out that silver was out of control and the "Terror Premium" should be washing out of $113 oil because of FUNDAMENTALS, not because of the trend, which Goldman Sachs and others told us would take oil to $140.  The next day, I pointed out how ridiculously priced PCLN was at $560 (back to $536 now) as well and predicted a pullback on the the Russell to at least 835 from 868 and we fell to 825 by that Wednesday and all the way back to 772 in mid-June as the Dollar moved from 73 up to 76 as the Greek crisis deepened.  Now we’re back at 75.60 and I warned Members in this morning’s Alert that a move over that line will be bearish but, on the other hand, a move below 75.40 will be bullish – this is why we’re in cash – we don’t KNOW what will happen so we watch and wait but we do have our bearish bets for the short-term, as we don’t expect earnings to go well.  Overall, my VALUATION has not changed.  I have not seen evidence that makes me feel that 1,333 should not be the top of the current 5% range for the S&P (with 1,270 a bottom).  Perhaps if earnings are strong and gasoline prices calm down and people get some jobs and Europe becomes more stable, then I’ll be happy to endorse moves above that 1,333 line but, for now – I think it’s overshooting the mark in the short run and I’d rather play it safe than sorry.  Has more money been made betting on the S&P to go higher than 1,333 or lower this year?  Until that’s not the case any more – it’s wise to play the odds. The NYSE needs 100 more points to get over it’s 2.5% line at 8,487 and I sent out a morning Alert to Members at 4:29 suggesting playing the S&P Futures (/ES) over the 1,340 line as our upside cover as well as the Dow (/YM) over the 12,600 line.  We got a big ADP Report that shows 157,000 Jobs gained in June vs just 68,000 expected and 36,000 in May and that rocketed the Futures with the S&P hitting 1,349.75 (up $487.50 per contract)    and the Dow touching 12,664 (up $320 per contract) and those are take the money and run trades because 418,000 people still lost their jobs last week with barely a dent in continuing claims so it’s hard to say if that ADP report (private sector only) is going to match up with tomorrow’s NFP.  At the same time, Goldman Sachs has issued a report saying the oil supply will be "critically tight" in 2012 and projects prices higher than they were before ($113) and that shot oil futures (/CL) from $97 to $99 in minutes while, at the same time Trichet announces that the ECB has "suspended rating requirements for using Portuguese debt in repo transactions."  That means that the EU banks can borrow at 1.5%, turn around and buy Portuguese debt for 18.9% interest and declare the note to be a cash asset – nice work if you can get it!  Isn’t it all just "extending and pretending"?  Who cares?  It’s a RALLY!!!EU shares are up 1% in London and Germany and up 1.4% in France and the US futures are up about a point already and we haven’t even heard about a budget compromise in Washington yet so the BIG push is on to take us into earnings week.  We’ll be rolling up our too-early short bets and looking for a few long covers – just in case – and, of course, we will be loving an oil short once we get past that 11 am inventory report.   If we’re still wrong next week – THEN we can formulate a strategy for being bullish over that 2.5% line but, for just a few more days – let’s continue to be careful out there.   

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