The Short Report

Discussion in 'Journals' started by michaelscott, Jul 14, 2007.

  1. Saturday, July 14th, 2007

    When I turned on CNBC on Friday, it almost seemed like a stadium in a Latin country just after the home team won the soccer game. So much joy, so much positive energy. It reminded me of the times of March 2000 where CNBC seemed like one huge party.

    Then when I turned on Bloomberg radio, reality came through. They were interviewing fund managers who were very bearish on the market and others who stated to pile into bonds. The reason was because of the reports that came out on Friday showing very weak retail sales. One notable fund manager came on Bloomberg stating that he thought the DJIA would be 15% lower now at the end of the year when it was now.

    One television station was reality where as the other one was all hype and drama. CNBC has been the greatest contrarian indicator of our time. Maria coming on during 2002 stating that we should all short the market and then 2003 being a landmark year.

    So with that said, I present to you the reality of the market. The following chart demonstrates the percentage of stocks on the NYSE that are above their 50 day moving averages.

    There is a pattern on this chart that is quite notable. For example, at the start of 2006 everything was very bullish. The indexes trended higher and there were no notable breakdowns to be found. However, this chart shows that from Jan 2006 to May 2006 there was a notable change from 85% to 60% of the NYSE stocks moving above their 50 day moving averages. Then followed the big dump once the 60% level was achieved.

    So the pattern forming is the following. The chart will hit 85% then there will be a pullback as fund managers either go to cash or pile into the leading stocks as they perceive an overbought condition exists. This usually takes the funds months to do as they sneak quietly out of certain equities. Now as the pullback occurs, the NYA index trends higher, but the index is now relying on less stocks to go higher.

    At the 60% level traders are using a high amount of leverage in leading stocks and not diversifying. When all of the buying power finally runs out then there is a resounding selloff in even the leading stocks and then the NYA composite takes its big dump. Everyone is using stop-loss orders at this point so even very minor pullbacks will cause huge sell-offs. On the other hand, since everyone is using a large amount of leverage anything can trigger a huge percentage gain.

    Over the summer when everyone is away the indexes will always tend to either trend higher or lower due to lower volume. There are fewer traders out there right now. The problem or solution occurs when everyone gets back from vacation. In September, when all the traders are back, what will they do when they turn on the monitors? Crashes, panics and pullbacks seem to occur in October. If these indexes keep floating higher during the summer, then a large panic is setting itself up to occur as the traders get back from vacation.

    I can only conclude right now that the the NYA is overbought at these levels. There is too much confidence in the air amongst the retail traders. The real professionals have snuck out and are waiting for a larger dump. The retail traders are busy bidding up RIMM ever higher just like they did with KBH in 2005 loading up with as much of the common stock as they can fully margined.

    The anecdotal contrarian indicator is CNBC, the retail traders station, where as Bloomberg tends to shine the real light on things.
  2. From the Stock Traders Almanac:

    "Since 1914 the Dow has gained 50% on average from its midterm election year low to its subsequent high in the following pre-election year."

    The smallest gains:

    1946 - 14.5% (industrial contraction after ww2)
    1978 - 20.9% (OPEC-Iran)
    1930 - 23.4% (economic collapse)
    1966 - 26.7% (Vietnam)
    1990 - 34.0% (Persian Gulf War)

    2006 low 10706 on June 14th.
  3. mike thanks for the post.
  4. Here is the good old Nasdaq. The COMPQ is still very much the wild west among the indexes. Look at how one month where 70% of the index is moving up as if peace has invaded the world and everyone has figured out how to finally work together. Then 3 months, later a resounding 15% are moving up as if all hell is breaking loose.

    In November, 68% of the stocks were moving us higher where as only 55% are helping us out now.

    The margin debt report concerns me.

    Year 2007 Margin debt SPX high=1554
    January $285,610
    February $295,870
    March $293,160
    April $317,990
    May $353,030

    Year 2000 Margin debt SPX high=1552
    January $243,490 $57,800
    February $265,210 $56,230
    March $278,530 $65,020
    April $251,700 $65,930
    May $240,660 $66,170

    Uh-oh. Looks like the SPX is at year 2000 levels except this time around it looks like everyone broke out their credit cards. Was there really more real cash around in 2000 then there is now?

    By the way, the margin debt level is 53% higher this year then last. Traders are breaking out the credit card so they can get more gains out of the indexes from less equities.

    I wonder how many traders reading this thread are on full margin?

    Wow! The market is up more then 11% since the start of the year, but the margin debt is up at least double that (possibly triple).

    I have a feeling that the height of margin debt will be 426 in 2007.

    The most current reading is for May, but its July. I can only wonder how much margin has been used to push the indexes to the year 2000 levels.

    There was more real cash in 2000 because the indexes had made very powerful moves from 1983 to 2000 creating wealth. There is not as much real cash today and therefore greater margin is used to achieve the year 2000 levels in the indexes.

    I was up in the bay area in 2000 and can say for certain that there was a lot more cash among the crowd then there is today. Guys in their early 20s driving around in new Lexus GS400s. Everyone seemed to have a good job back then. An administrative assistant could easily obtain a six figure salary!

    Today, there is more margin then there is cash. Real cash was destroyed in the drop and so they have now substituted credit for the real stuff.
  6. Here is my featured short. Actually, this year, I have found myself buying puts rather then shorting the common stock. The simple reason is that you can only lose the amount you have invested by buying puts where as you can lose more then you invested by going short. Puts also have a much larger potential to increase in value where as shorts do not have as much potential. Puts can also devalue rather quickly though...

    RADIOSHACK!!! Come on. Did everyone really think and believe Radioshack would turn into this Circuit City like outlet? Did anyone really believe that Dell would buy this POS out? Please...

    There are some equities where it feels so right to short em. Oh Radioshack, going much lower...

    My puts have done nicely.

  7. It appears that we are at a point in the indexes where value might be thrown into the trash. In 1998, when growth stocks were on fire, insurance stocks started burning in.

    One stock in particular, All-State, is worth mentioning here. This stock has participated in none of this years rallies and is down 10% this year where the total market is up 11%. In fact, the 50 and the 200 just crossed. The analysts are downgrading the stock, margin pressures.

    In this environment, everyone is listening to the analysts and no one will touch the All-State common for a while.

    Some long dated puts are of worthy consideration.
  8. The Real $SPX

    The $SPX is a weighted index. Exxon is lifting the $SPX to a new all-time high, while the rest of the components is busting through the traps. Lets take a look at the real picture if the SPX was equally weighted.

    The below chart is of the equally weighted Rydex index. You can see how the index hit a triple top on Friday.

    The following link tells me that there are 200 stocks ripe for shorting on the SPX with more to join us shortly. Exxon saved the day on Friday for the longs, but the larger picture is that the seats are being removed from the dance and when the music stops, some people will be sitting on the floor...$SPXA50

    Here are the weightings of the SPX. Im certain that the final 200 on the list are probably apart of the stocks under 50 day moving average. Wait. Do I see Radioshack at #456?

    I saw how the good doctor is finally going bearish on this market. He sees how the big money is slowly tip-toeing out leaving behind Makloda and Steve Tvardek type traders at prop firms to bolster the indexes while Goldman Sachs tips their hat and exits before the party is done.
  9. Is this an actual journal posting trades (symbol, entry price, exit price + reasoning for each transaction) or just a disarray of paranoid thoughts about an impending bear market?
  10. I understand your point, MS... but I doubt Maria said everyone needs to "short the market." No tv personality on a financial network could get away with that - they're not allowed to give financial advice.
    #10     Jul 15, 2007