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Color Me Cautious

Investors are getting much more bullish after a 12% run up in 2 months. Of course they are. This is how the market works. It sells off; people get scared and sell as they did leading up to the fiscal cliff. Then it rallies and people get excited and buy as they are doing today. This is why professional investors make a living taking money from novices. They understand these forces of human nature in the markets.

This increase in bullishness has me more worried by the day. You see, I’m a long-term investor but I can’t buy and hold. I love bargains and euphoria makes me anxious. I buy when others panic and it’s not easy. In fact, it’s extremely difficult to maintain confidence in your research and really any semblance of self-esteem when the market, the media and everything around you is telling you you’re an idiot. It’s also very difficult for me to hold on to something that is being embraced by the investing public simply because of these forces of human nature. All around, it’s a damn tough gig but I love it. Does that make me a masochist?

So I’m having a hard time holding on to the stocks I own right now as investors become euphoric. In fact, I’m not holding on to all of them; I’ve started lightening up over the past couple of days. I’ve sold a couple of things that looked like they were direct beneficiaries of the growing euphoria. And I’m starting to see more and more opportunities to short things that have gotten way too euphoric. RIM (RIMM) is one that looks ripe for a stab on the short side. It’s tripled in price since the Fall on speculation that the company’s new phone, the Blackberry 10, will bring customers back. I have no position and don’t intend to take one but it’s one that’s caught my eye as this short squeeze could evaporate as quickly as it appeared.

Back to the market, I’m almost always early in looking for swing trades like this. If the market tops out it’s probably got a bit further to go before it does. As Laszlo Birinyi told CNN Money today the last stage of a bull market usually sees the best returns. Remember the last stage of the internet bubble? The Nasdaq doubled in about six months leading up to the March 2000 peak. It then gave it all back over the following six months. I missed the whole thing while buying “old economy,” “bricks and mortar” companies that were ignored and undervalued at the time. And I can almost guarantee you that my aversion to euphoria will cause me to miss the next parabolic run up like that one.

I don’t think we’re in another bubble right now. Stocks are just about fairly valued. Back then they were ridiculously over-priced. But this bull market is a bit long in the tooth and it’s been about four years since the end of the great recession. Typically, the country experiences a recession every four to five years. For those that don’t know, recessions aren’t good for risk assets. So I’m just keeping my eyes open for signs this bull market may be coming to an end. Euphoric sentiment, waning momentum and overvalued stocks are what I’m looking for. While these are all advancing to one degree or another I don’t think they’ve quite precipitated the kind of capitulation that marks a major top. That doesn’t rule out a correction, however, which may be healthy after the run we’ve had over the past two months.

Technically, this head and shoulders pattern in the Nasdaq is a major red flag for this bull market that bears watching. As I’ve said before, it’s worrisome that all the other indexes are making new highs and the Nasdaq struggles while forming this near picture perfect topping pattern.

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I’ve also noticed some exhaustion indicators popping up the S&P 500 Index. The daily chart has formed a DeMark Sequential 9-13-9 in this surge over the past couple of months while money flows have surged (investor euphoria), as well. Momentum has also been waning throughout (MACD histograms at the bottom).

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The weekly chart will almost surely see a Sequential 13 (sell signal) triggered on Monday. This comes right as it touches the upper range of an ascending wedge pattern. Momentum, as represented by stochastics and MACD, is waning on this time frame, as well.

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Couple these technical warning signs with a level of bullishness that hasn’t been seen in two years and you can color me concerned.

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See all of my annotated charts at “Reading the Tea Leaves” on StockCharts.com

Hit the Links

  • Bull market winding down. Don’t panic. (CNN Money)
  • Bullish Sentiment Surges To A Two-Year High (Bespoke)
  • In Defense of Apple (Seeking Alpha)
  • Google report reveals US government requests for data bypassing judicial approval (Guardian)
  • Beer bubble? We’ve now gone from microbrews to nanobrews (Fast Company)
  • 11-Year-Old Girl Smashes Climbing Records – (BuzzFeed)
  • One of my favorites and maybe one of the best songs ever written (DailyMotion)

Follow me on Twitter to read and discuss stories like these in real-time.

 

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