Monday, March 26, 2012
Monday, March 19, 2012
New Column in the Santa Monica Mirror
I am pleased to announce that I will be writing a new column that will appear in the Santa Monica Mirror every Monday. I will post links here in my blog for each article. Some will be republished articles that I have already published in other publications, and some will be new content. Please visit my blog often, and also please visit the Santa Monica Mirror website at:
http://www.smmirror.com/#mode=picks
http://www.smmirror.com/#mode=picks
Stocks ripe for a significant correction in the short-run
We are currently at 1,406 on the S&P 500; a level which gives me great pause. I have been and continue to be one of the most optimistic commentators on the markets, with a 1,500 target for the S&P500 sometime this year. However, I did not expect to see the index skyrocket straight up to 1,500 with no pull-backs. We ended 2011 at 1,257. So far, we have seen the index rally almost 12% year-to-date. Apple has been a key driver for the markets, rallying from $405 a share at the end of 2011 to about $600 per share, or by 48% year-to-date. As I have written, the chart is parabolic - going vertical. This pace cannot be sustained, and the higher Apple and the market go, the more risk to the downside we face.
The small investor is largely responsible for driving the current overbought condition the markets are experiencing. Cash has now begun to come out of the long end of the bond curve and into stocks. This means that bond investors are assuming more risk than they are comfortable with, to try and capture some additional return, since bond yields are so low, and bond prices are so high, leaving little room for attractive or acceptable bond market returns. Bond investors are extremely fickle when it comes to risk, and will exit very quickly from stocks, at the first sign of trouble.
Just as we have witnessed accelerating buying on the upside, and markets driven to extreme overbought conditions, we will see momentum build on the downside as the markets roll-over. Virtually everyone who has invested in stocks over the past six months has a significant profit (on paper). They will not want to see those profits erode, once stocks start to sell-off. The rush to lock-in paper gains will drive an avalanche of selling pressure, which will drive the stock market down well past normal correction levels, to an extreme oversold level.
Stock investors must accept and become accustomed to the wider swings and heavier volatility of today's equity markets, which are driven by small investors, more fluid capital flows from all asset classes, including bonds, gold, and even real estate, and the linkage of international markets and currencies, making it much easier for foreign investors to get in and out of U.S. markets. With this greater volatility comes greater risk, but also greater opportunity. However, it also demands that investors alter their was of thinking and investing to both protect profits from significant corrections, and raise cash to increase flexibility, to have the ability to invest when markets correct to oversold levels. While there may be certain times when a buy and hold strategy can work for a given market environment, these times will become increasingly rare. Those who stick with the old way of investing using buy and hold are akin to the military commander fighting the last war. Investors must adapt to the ever-changing investing environment, and that environment today demands more active management, flexibility, and a new way of thinking regarding the use of cash as a true asset class within all portfolios.
The small investor is largely responsible for driving the current overbought condition the markets are experiencing. Cash has now begun to come out of the long end of the bond curve and into stocks. This means that bond investors are assuming more risk than they are comfortable with, to try and capture some additional return, since bond yields are so low, and bond prices are so high, leaving little room for attractive or acceptable bond market returns. Bond investors are extremely fickle when it comes to risk, and will exit very quickly from stocks, at the first sign of trouble.
Just as we have witnessed accelerating buying on the upside, and markets driven to extreme overbought conditions, we will see momentum build on the downside as the markets roll-over. Virtually everyone who has invested in stocks over the past six months has a significant profit (on paper). They will not want to see those profits erode, once stocks start to sell-off. The rush to lock-in paper gains will drive an avalanche of selling pressure, which will drive the stock market down well past normal correction levels, to an extreme oversold level.
Stock investors must accept and become accustomed to the wider swings and heavier volatility of today's equity markets, which are driven by small investors, more fluid capital flows from all asset classes, including bonds, gold, and even real estate, and the linkage of international markets and currencies, making it much easier for foreign investors to get in and out of U.S. markets. With this greater volatility comes greater risk, but also greater opportunity. However, it also demands that investors alter their was of thinking and investing to both protect profits from significant corrections, and raise cash to increase flexibility, to have the ability to invest when markets correct to oversold levels. While there may be certain times when a buy and hold strategy can work for a given market environment, these times will become increasingly rare. Those who stick with the old way of investing using buy and hold are akin to the military commander fighting the last war. Investors must adapt to the ever-changing investing environment, and that environment today demands more active management, flexibility, and a new way of thinking regarding the use of cash as a true asset class within all portfolios.
Thursday, March 15, 2012
Short Apple!
Okay, I know I wrote about this before, but my previous post was more of a suggestion. Apple is now hovering around $600 per share. The chart is the textbook definition of a parabolic curve - it is going vertical. There is no way to tell exactly where this stock will top out, and they do have over $100 billion in cash. However, the stock has made a gigantic move over the past few months and is now worth more than 11% of the entire S&P 500. It is responsible for 34% of the entire year-to-date gain for the NASDAQ 100 index. For this price and momentum to be sustained, one would have to believe that the company can continue to produce the same level of explosive growth and product development.
As I wrote previously, I do not believe the company can sustain its previous product development pace and quality without Steve Jobs. The recent release of the iPad 3 only serves to reinforce this belief - rather than releasing a new, revolutionary product, all they have done is improve an existing product. Granted, the improvements contained in the iPad 3 appear to be very significant, especially with regard to the display graphics, but this is not going to be enough to get most people who currently already have an iPad to go buy a new one. Yes the iPad 3 will sell well, but at the end of the day, for the vast majority of users, the iPad is nothing more than a gadget; a toy; a novelty. The market will eventually become saturated, and demand will wane.
My previous article, which explored the future of Apple, post Steve Jobs, was more of a strategic, long-term opinion about the company's ability to continue to release completely new products that establish new categories, etc. My call today is a short-term, tactical call, based on the pace of the stock price increase and the backdrop of the overall stock market rally we have experienced over the past few months. I believe strongly that the market is due for a correction, and the higher we go in the short-run, the more severe will be that correction. Should we get a 10% or greater pull-back in the overall market, I believe Apple will suffer at least twice the percentage drop.
As I wrote previously, I do not believe the company can sustain its previous product development pace and quality without Steve Jobs. The recent release of the iPad 3 only serves to reinforce this belief - rather than releasing a new, revolutionary product, all they have done is improve an existing product. Granted, the improvements contained in the iPad 3 appear to be very significant, especially with regard to the display graphics, but this is not going to be enough to get most people who currently already have an iPad to go buy a new one. Yes the iPad 3 will sell well, but at the end of the day, for the vast majority of users, the iPad is nothing more than a gadget; a toy; a novelty. The market will eventually become saturated, and demand will wane.
My previous article, which explored the future of Apple, post Steve Jobs, was more of a strategic, long-term opinion about the company's ability to continue to release completely new products that establish new categories, etc. My call today is a short-term, tactical call, based on the pace of the stock price increase and the backdrop of the overall stock market rally we have experienced over the past few months. I believe strongly that the market is due for a correction, and the higher we go in the short-run, the more severe will be that correction. Should we get a 10% or greater pull-back in the overall market, I believe Apple will suffer at least twice the percentage drop.
Monday, March 12, 2012
Tuesday, March 6, 2012
At least Cramer is consistent
Remember when I wrote about how idiotic Jim Cramer is back in December when he was saying that Bank of America might file bankruptcy and he hated the financials? That was when they bottomed before rallying huge. Just last week, he began saying how much he loved financials, after that giant up move. Here is the chart of the XLF - the S&P financials sector spyder:
I know I don;'t need to state the obvious, but I will, because I enjoy pointing out how completely stupid Jim Cramer is, and how he should be banned permanently from television, or from any medium where he can give investors terrible advice. You can see in this chart that he came out negative on the financials in mid December, right when they hit there recent low, then they rallied about 22%. Then, last week, right at the peak, he said he loves the financials. Since then they have fallen (so far) about 3% including today's drop. As I have stated many times, a reasonable strategy would be to do the exact opposite of what Cramer recommends.
I know I don;'t need to state the obvious, but I will, because I enjoy pointing out how completely stupid Jim Cramer is, and how he should be banned permanently from television, or from any medium where he can give investors terrible advice. You can see in this chart that he came out negative on the financials in mid December, right when they hit there recent low, then they rallied about 22%. Then, last week, right at the peak, he said he loves the financials. Since then they have fallen (so far) about 3% including today's drop. As I have stated many times, a reasonable strategy would be to do the exact opposite of what Cramer recommends.
Stocks crack
Stocks are down significantly today, which may lead to the first triple-digit drop for the Dow this year. All three major indexes are down well over 1%, with the NASDAQ leading, down over 1.6%. Technically speaking, we have broken down through the breakout zone on heavy volume, which is a short-term negative. Investors may react in the very near-term with some buying, thinking that this is a good opportunity to get in, so we could see a quick bounce this week. However, as I have been writing, I believe we are due for at least a 10% pull-back, so I am sitting on my 50% cash position for the time being.
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