Tuesday, August 12, 2014

Meow. Dead Cat Bounce?

The US indices all opened and surged green today. This is on top of surging last Friday before the week closed. Why? Who knows man, this market just doesn't make sense to me anymore.

There are a tons of reasons and arguments for both the bulls and the bears, but I still lean towards being bearish. So many of the investment greats of our current time has stood up and vocally talked about side-stepping the market from here onwards, yet investors are still piling in.

When people say cash is on the sidelines, it's absolute crazy talk. Where are their facts to back up their claims?


As Tiho from The Short Side of Long points out, investor's are still mega bullish when viewed from the lens of the big picture. I think this is an accurate picture. This isn't sentiment about being bullish or bearish. This is actual allocations, and it does not paint a bullish picture to me.

Far too many people have been employing the Buy The Dip (BTD) strategy, using short-term indicators. And based on short-term indicators, the market was oversold and due for a rally. Perhaps that is why the S&P has rallied up 0.8% today while the Russell 2000 exploded 1.6% to the upside within just 3 hours of today's open.

However, if you really take a step back and look at the big picture, the evidence against a continued stock market rally is damning.

John Hampton from Solar Cycles is one of the best aggregators of all these evidences. Even if you don't believe the more "fluffy" evidence of solar peaks and demographics, it is hard to argue with margin debt, divergences, market breadth, HY bond spreads, Shiller CAPE, Q-ratio and many others....

Nothing makes sense to me. People say that the stock market is generally efficient in pricing and discounting the future. The wisdom of crowds, they say. Well, just like how the whole world, mother, father and grandmother was predicting bond yields going up at the start of the year, and investors should be underweight bonds, I think this is the exact same case right now. Investors are piling into equities under the pretense that "stocks may look expensive, but bonds are even more expensive" and under this new crazy notion called TINA (There Is No Alternative). All the pundits are saying that equities is the only game left in town, and by investor cash allocation, it does seem that the masses believe that. This is exactly Bob Farrell's rule #9: When all the experts and forecasts agree -- something else is going to happen

As of now, I have reloaded on my shorts and I am now using classic resistances to help me find good risk-reward trades and also to signal me to cut losses if the mad get even more mad and panic buying ensues. I am hoping for a plunge back down since now the market is clearly overbought in the short-term. Oh, the irony of it all.

Stay safe out there guys, it honestly doesn't feel good to me.

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