A big
push higher on Monday, followed by typical dull summer trade, then
the holiday. I didn't do a 2nd quarter recap. The quick version is
that stocks were up, bonds and gold are still having very good up
years. I have done okay, but nothing to write home about. My weekly
trade recap is at the end of this post with new longs in MSFT and
XLU.
I found
a sky will fall kind of article on Forbes (link1). Countering that a
very bullish seasonal pattern that is soon to unfold.
The only
certainty is that the more popular these crash columns are, the less
likely that a crash is going to happen. This particular writer made a
name for himself by calling the 2008 crisis. The old cliche don't
mistake a bull market for brains may be in operation. Don't mistake
one good call, one profound insight, calling the 2008 crisis, for
real expertise in bull and bear markets.
Sure some of the charts and
warnings in the article are valid, even compelling. I have cited some
of the same things such as the Schiller PE10 CAPE indicator. I wrote
about the signs of a top a month ago (Tea Leaves for a Market top
link2 and mentioned it back in 2013 link3).
The
Forbes writer does some cherry picking on indicators. While some
indicators are in bearish territory, many more are solidly in the
average range. Selective vision tends to be the nature of fear
mongering, sky is falling, points of view.
Seeing the big picture the
whole picture means the sky is falling (the financial sky will fall,
but major market crashes are every 20 to 50 years (depending on how
big a decline is a crash), not every five or seven years like so many
of the wrong-way bears seem to think. The widely cited CAPE (ten year
average of earnings) will see a big shift in 2018, because the year
2008, when many major companies reported a loss, will drop off the
ten year average of earnings.
The big
surprise for the mega bears might be that the stock market's ten-year
pattern is about to enter its most bullish 18 months. This bull
period starts September 30, 2014, ends March 30, 2016. In the middle
of that, is the decennial pattern, that has year five of the decade
as the most bullish of all years (Martin Pring has a good write up but the pdf will not link, search on "stock market decennail pattern, search link).
This
means there is a chance that the widely forecast big banana stock
market event in the fall turns into a big banana split and ice cream
for everyone. With so many traders positioning for a big down move in
the fall of 2014, by raising cash, buying puts, buying VIX calls,
will the orderly drumbeat of the virtual army of bears turn into a
panic and complete rout? Will the bears break ranks and scatter if
there is yet another big rally? Will some bigger bolder bears go
broke by going against the trend? Stay tuned Bat fans.
As long
time readers know, I am not a fan of predictions. Predictions are
mostly for entertainment, a fun game, but only have a little to do
with making money. The money tends to be made doing the mechanics of
trading, right sizing of positions, asset allocation, managing risk,
taking losses as needed.
Some
bullish arguments include an economy that may finally have some
semblance of a normal recovery. The fracking oil boom means energy
independence for the U.S. by 2020. Recent quarterly car sales were
strong, above expectations. A good economy, might mean that every day
people might have some money to spend, and businesses will do well.
That would translate to higher earnings for public companies.
Most
major market tops typically experience exuberance. While market
timers may be super bullish, I observe fewer and fewer people paying
much attention to paid market timers. Big time hedge fund managers
seem to be more in the public spotlight than in the past. The people
I meet in person and online, remain mostly cautious. I continue to be
cautiously bullish. Some are raising cash, a few are buying puts for
insurance. Yes, there are some signs of froth. The GoPro camera
company IPO doubled in its first four days of trading. It is too fast
a situation for me to trade. Some other big speculative stocks such
as Netflix leaped to an all time record high. I am still looking for
much more public exuberance before a major top is in place.
The
caveat for the bullish seasonal pattern, is that seasonal patterns
tend to the weakest and the most likely to be front run. For a made
up example, if it is found that the market is always up on the 3rd
trading day of the month, traders will buy on the 2nd day, and then
the first as people spot these tendencies. If enough traders do this,
the pattern becomes mush. With that, there may be broader
psychological and social factors that influence the ten-year pattern
because people behave differently at big milestone years such as
2000.
Another
caveat is that while a major market top seems extremely unlikely, a
correction of 5% to 10% can happen at any time. The recent past has
been an unnaturally calm period. This USA Today article says 1000
days, 33 months, without a 10% correction (link5).
Much
more natural is up and down trade. Big down days, weeks, months are
part of normal action. They will come back, but their first
appearance doesn't likely mean an imminent crash. If we do see a
continued melt up, there might be a major top without a warning shot
correction, but much more common is one or more warning shocks before
the big one hits.
My
weekly trading summary follows:
Thu
Sell MSFT Aug 38 puts .16 @41.8. New long position in Microsoft.
Sell XLU
Sep 40 puts .39 @42.5. New long position in the Utility etf, with
three hard down days and decent chart support.
Tue
Sell IWM Aug 108 puts @119.6. Later in the trading day, I sell some
IWM Jul 114 puts @120.4. As the Russell 2000 continues to rally, I
keep tap dancing, selling more and more layers of puts, rebalancing
my net short position. A close above 120.6 and I cry uncle on the
July 120 calls.
Elsewhere,
I hold my nose and buy. I open August positions in Anadarko Petroleum
APC, Berkshire Hathaway BRKB, Disney DIS, and United Healthcare UNH:
Sell
BRKB Aug 120 puts @127.0.
Sell APC
Aug 92.5 puts @109.0.
Sell DIS
Aug 77.5 puts @86.6
Sell UNH
Aug 75 puts @82.1
Mon
Sell IWM Jul 112 puts @118.7. I rebalance my position in the Russell
2000 etf. I am still net short, but a bit less so. Nearest short
calls are the June 120 calls. If IWM makes a new high on the close
(120.6 or so), I will cover these short calls. I have multiple layers
of short puts.
Position
summary:
long
AMGN APC ASH EPI EWG HON JWN
long
MON MSFT SLB UNH VRX WAG XLU
net
neutral DAL DIS GLD SPY
net
short IWM
