Don’t lose sight of the prize! Going long broken tech stocks for a bounce is a distraction and dangerous (DDD, BLOX). Insider distribution is occurring. Big Money is feeding the beast. We are Topping and it is a process. The Bull Market in Monetary Illusion and Fed Wizardry has been fun but alas it is ending. I know most of you are traders, but remember it is at big market turns that people get wiped out or extremely rich. Unfortunately more get wiped out than rich and that is why turns occur. Too many sailors on one side of the boat and a violent move to bring it back into balance.
Large cash positions are warranted to take advantage of the next short set-up. Here is my take. The market looks like it wants to go higher. Could it melt up? Yes it could. However, if you follow cycles we should have a trading cycle top, an intermediate term cycle top and a seasonal cycle top occurring all at once. Very powerful voodoo indeed for those of you who have no idea about what I am talking about. These cycles are expected to bottom in the June/July time frame. If nature takes hold then we should expect a 10-12% decline. I am using the DOW as my measuring stick because of its long recorded history. I EXPECT A NEAR TERM TOP SHORTLY! Could I be wrong? Yes. I own some Puts on the DIA and I am 90% cash. When I see the set up I will pile on. If I am right then the rally out of that low can and should be played on the long side.
Remember people lets KEEP IT SIMPLE! There is a disturbance in the force and I know most of you can feel it. Number 1 and 2 below will suffice in guiding us but the others just add insult to injury.
1) The Fed and China are tightening. What if the ECB does not start their QE?
2) We are now in month 62 of the longest four year cycle advance in history!
3) Profit margins are at peak.
4) Corporate revenues and earnings appear to be decelerating.
5) Margin debt, corporate net debt and global government debt are above 2007 levels. We had a debt problem so we solved it by adding more debt. It is the definition of insanity and it will end very badly.
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I think anyone with sense should be hugely cash or hedged prior to next weeks ECB.
All the PM’s I talk to are very worried that a huge portion of the market has priced in something that Draghi won’t (can’t?) deliver.
If he disappoints, we will go straight back to the bidless action seen recently in the R2K.
If he doesn’t disappoint I expect a huge short covering rally followed by a Rug-Pull which will represent an intermediate term top.
Today should be interesting. Watch the open.
bluestar
How would us mere mortals short the market and profit from the impending boom?
I think you will be right soon, but not this soon. This is the most bearish top ever. It’s probably 40% bulls 40% bears and 20% undecided. Seems like denial.
Albeit VIX is really low. But then again how often does it go low for a second and then just explode?
Thanks for another awesome article Ed. I am really enjoying your perspective both here, on Twitter and in the Cycleman audio interviews. Thanks again for sharing your views. I’m listening.
Hi Bluestar,
How did your fund to in 2008?
completely agree bluestar. being long up here is akin to being short vol. Im loaded in july SPY puts.
Slinky,
I am just a man with an opinion. I am often wrong but I am more right than wrong.
Best
Bluestar,
if you are playing via options. Which ETFs or stocks would be best to bet against.
TNA – put spread
IWM
AMZN
CRM
DIA
an woule it be august or july puts as per your plan.
Jworthy,
Thanks for your kind words. I just want the little guy to become aware. Most people here are big boys and girls and can take care of themselves. I am worried about the 65 year old ER doctor who asked me in February if he should put his money in stocks. He was upset about missing the move last year. He is retiring and I told him what I thought and He thanked me. 65 and about to go all in on the stock market. Thats partly how I know we are weeks to months away.
JB
We beat our benchmark in 2008 by 200 bp. We were top of peers. We then made the turn in 2009 and beat the benchmark by 50 bp. Only 10 percent of all active managers got both years right. Our asset gathering exploded in 2010 and 2011. I use cycle work to watch for turns and stock pick in between the turns. Most PM’s suck at turns. Price always leads bad fundamentals on the way down and price leads good fundamentals on the way up out of the bottom. Listening to management teams is a waste of time at turning points. In the bottom of 2009 things sounded horrible but the market was singing a different tune. I did not catch the bottom but we beagn turning the portfolio from defense to offense by the end or April and May of that year.
Bill,
I own sept DIA puts. Will buy more shorter dated ones on a signal. Will short AMZN cash as it is broken.
I am also out of stock
not the time to be a perma bull
thanks bluestar
Bluestar, you really going to short AMZN in the hole, down $100 from it’s high? Doesn’t seem like the smartest strategy.
Jesse,
I said I need a signal and second AMZN is a freaken disaster fundamentally and technically. I think $320 would be a good entry point. I think ChessNwine mentioned that level. I am sad that it is down today at $308. If I am right on the market AMZN will go down for a trade. This thing is broken. It is over.
I hear you, but I just think there are better shorts out there. These SaaS/Big Data names are so ridiculously overpriced it’s not even funny.
WDAY, CSLT, N etc. See SPLK grenade today.
Agree. Those are Tasty. Valuation Shorts are tough. I like the fact AMZN is expensive even down here and the fundamentals are clearly broken. Very liquid as well.
I think we just got the dead cat bounce in WDAY from $65 to $87 this week. It’s sold 6 pts in 2 days after a beat and raise. Bearish.
Are you short? I agree. They guided billings down sequentially and I heard they struggled to close business a tad. May have had to pull big deals in from the pipeline to make quarter. Cash flow in my opinion sucked.
Yes, also long CSLT puts but those are illiquid. Even after crashing from $40 to $15, CSLT is STILL trading at 65x ttm sales and 31x FY14 sales. What a joke.
Do you have any recommendation for books on Market Cycles? thanks
Always interested in hearing the other side of things, but I have to disagree with all the doom and gloom. While we’re seeing some signs of inflation, time will tell if this spells trouble or if it’s just a function of the economy recovering. Interest rates are low with no real threat of them increasing anytime soon. Companies, after cutting costs have higher profit margins and are flush with cash. They’re using that cash to increase dividends to shareholders , buy back stock, pay down debt and make acquisitions. So the environment for stocks is still good overall. I just don’t see your reasoning, other than your technical analysis of what appears to be a topping action in the market. Could it simply be just a period of consolidation prior to the next leg higher?
Bushwacker,
Thanks for your feedback. I will start with the last thing you said. Yes it could be a consolidation prior to the next leg higher. I could be wrong and if that pattern should emerge I will back off my bearishness. The market could definitely have a blow off top and end in a phase transition. However, the outcome would be the same and the ugly decline on the other side would be the same. Again I want to point out that we are in month 62 of this current four year cycle advance which is now the longest in stock market history. Statistically we are closer to the end then the beginning.
I am not a perma bear always talking gloom and doom. I love financial markets and how they work and I have spent years trying to figure out market psychology. Everyones worst enemy in the market is themselves. I have tried to learn from my mistakes. One thing I am good at is admitting when I am wrong and cutting my losses. Ego is the killer in this business. I would love to get bullish but I can’t given the way I see the world and watching how uber bullish most people managing money are these days.
You talked about interest rates. They are irrelevant vs the QE. The Fed is ending QE and the market multiple will go down as a result. Essentially the Fed is tightening which always causes a contraction economically.
Record margins are not a good thing because that means they have peaked and stocks discount the second derivative because trust me they are about to go the other way. There is no revenue growth for the market as a whole and the dividends and stock buybacks you talk about have been mostly funded by more debt. The net debt of corporate America is actually higher now than at the last peak in 2007. The record cash meme we hear on CNBC is just not true. Net debt is what matters. Once the capital markets stop funding this pozi scheme the dividends and buy backs will slow and earnings and stock prices will crater. This recovery has not been due to organic growth it has been financial engineering on a massive scale.
Tom DeMark a famous market timer has said “Markets never top on bad news nor do they bottom on good news.” I will be getting bullish again in about two years (average length of bear market) when things sound awful, dividends are being cut, companies are declaring bankruptcy and Obama has declared martial law.
Best
JB,
Walter Bressert. http://www.walterbressert.com/pdf/Manual.PDF
Ted Warren: How to let the stock market make money for you
http://www.amazon.com/How-Make-Stock-Market-Money/dp/B000J4LEXE/ref=sr_1_3?s=books&ie=UTF8&qid=1401593604&sr=1-3&keywords=ted+warren+how+to+make+the+stock+market+make+money+for+you
Not a cycle book but a cool look at how to identify 5 to 10 baggers off of multi year bases.
http://www.traders-talk.com/mb2/index.php?showtopic=154478
Bluestar is that you? 😀
Bruce,
No, not me.
Oh. 🙁
Martial law comment makes me nervous to believe you, until then it was ok. Don’t you think it’s extreme
Bill,
I was trying to make a point. When it sounds awful and feels awful and you are fearful with every fiber in your body then buy. Martial law, war whatever my point is buy the bad news.
That’s better. That can come at sp500 at 1700….. No need for gloom or doom scenario of sp 1200 or below.
Just be prepared. There has not been a 10% correction in over 2 years. We are due and I think soon. I think we go down 10-12% then rally to new highs but then it will be a one way train down.
have you looked at solarcycles.net by john hampson..whats your thought??
Salesforce Bottom Line Is Put at Risk by a Slide in the Company’s Stock http://dealbook.nytimes.com/2014/06/02/falling-price-of-shares-creates-risk-at-salesforce/
I don’t know much about solar cycles but I believe there is likely some validity to them.
Matanzas,
Thanks. I agree with this. It has been a great stock for a long long time. I was an uber bull back in 2005 but all great growth stories mature and I believe this one is fast approaching that time frame. All good things must come to an end. Unfortunately Benioff is still under the illusion they are a fast growing company hence the heavy S&M spend without the corresponding revenue growth.
“Price always leads bad fundamentals on the way down and price leads good fundamentals on the way up out of the bottom. Listening to management teams is a waste of time at turning points.” This is all anyone needs to understand in order to have a successful start. The rest — modelling, tactics, portfolio management — all flows from these wise words.
Effin’ insightful.
Jay,
tough racket. not easy.