Looking At The Coming Week

Monday is going to be an interesting day as it will be the seasonally strong first day of the month. In addition, the ISM report will be released at 10 AM, which many are viewing as a key report. Many believe this report holds the key as to if we are entering a double dip.  I don't know that this report is the be all, end all but I do think the economy is weakening and most reports are likely to surprise to the downside. If it matters to a lot of people it could matter to the market.

A few days ago I thought we would see a turn lower in the market some time next week but that weakness came this week. I am going to stick to my call for strength early in the week and weakness later in the week but with very little conviction. Have a great weekend. 

Uninspiring But Cheap

Amgen's earnings were uninspiring. They missed revenue estimates on almost every drug they sell and lowered revenue estimates for the remainder of the year. They have a new blockbuster drug scheduled to be released but they didn't even seem very enthusastic about it on the conference call.

And the stock is rallying quite nicely today. That is what is nice about being a cheap stock. I have seen analyst reports showing that if Amgen never comes up with a new drug, the current value of future cash flows of existing drugs is worth about $70/ a share, even at a reasonably high discount rate. A takeover of Genzyme should help cushion any downside as well, as more cash is available to be deployed in the sector.

You Know That I Go To Extremes

For the past few months the market has gone to extremes, whether they be on the downside or upside. It has paid to wait for the market to become maximum overbought or maximum oversold before trying to call a turn. Just when everybody has gotten used to this dynamic it has changed.

The decline that started a few days before option expiration lasted only a few days and stopped well before the market became maximum oversold. The market would have been maximum overbought today but the market has been struggling since early in the week. Markets do not usually reach maximum oversold or overbought, even though in the past few months they have done so on a regular basis. The reason I focus on it is because when they do it is a pretty good indicator that there will be a correction of the move.

Because the market has not reached maximum overbought and because sentiment has not reached an extreme I do not expect that we will see a sharp move lower. The caveat is that the market will now be focusing on economic data that will start coming out next week and I don't expect it to be pretty. But few people do.

Cut The Hedges

I reduced my hedges today. My hedges have grown as the market has risen, since I am short the August SPY 108 Calls. Originally it was an out of the money call that I shorted and it is now well in the money. Additionally, the Pfizer puts I am short are now well out of the money and require less protection.

What About Amgen : Part Two

Even if Amgen is seeing some weakness because of European austerity or less people visiting the doctor in the US, I believe the stock is a buy on weakness. At this price everything is priced in and then some. I just don't want to buy today because I don't want to step in front of that possible weakness. Amgen reports tonight.

What About Amgen

Amgen is a stock that has been in my portfolio many times in the past few years as it was the first biotech company to reach a ridiculously cheap valuation. It would seem an obvious choice in playing a Genzyme takeover as it is the largest component of every biotech index and when the Genzyme cash comes rolling in it is sure to benefit.

While Amgen is a good choice as well, there are a few reasons I chose to go with Gilead. Gilead has been crushed lately while Amgen has held in relatively well making the valuation very similar. The difference is that Gilead is doing a very aggressive buyback while Amgen completed one in March and does not have as much onshore cash available. Additionally, sentiment on Amgen has been positive and I am more worried about an earnings disappointment.

All in all Amgen seems like an excellent choice but I want to wait until after earnings tonight before starting a position.

End Of The Month

Risk assets around the globe are rising this morning as managers jockey for end of month positioning. If the turn of the month turns out to be a strong period than the market will be quite overbought by early to the middle of  next week and seasonality will no longer be positive. The economy is still deteriorating but that has been the case for a while and is something to keep in mind but not the most important factor in the short term.

The bulls have a few positive factors in their favor that make me hesitant on the short side. Hedge funds de-risked during May and June. They probably have reversed that position somewhat but their positioning is still on the conservative side and re-risking could drive another leg higher. Sentiment is still on the sour side in general. Additionally, it looks like we will see a $20 billion Genzyme takeover in the weeks ahead and share repurchase activity has been solid. All in all there are both bullish and bearish arguments to be made and I still don't see an easy trade.

Weekly Jobless Claims

We will be getting the weekly jobless claims numbers tomorrow morning. If there is a further sell off as a result of those numbers than stocks could probably be bought for a short term trade as I expect a decent turn of the month period. Have a good night.

Calculated Risk Day

Calculated Risk posted a list of factors pointing to a second half slowdown. I have published a similar list numerous times in the past and it bears repeating. From Calculated Risk:
1) less Federal stimulus spending in the 2nd half of 2010.
2) the end of the inventory correction.
3) more household saving leading to slower growth in personal consumption expenditures.
4) another downturn in housing (lower prices, less residential investment). 

5) slowdown in China and Europe and
6) cutbacks at the state and local level. 

I view a second half slowdown as a virtual certainty but profiting from it is not quite so simple, as anybody who has been bearish for the past few weeks knows. Shorting when the crowd turns bullish represents the best risk/reward opportunity.

Too Late To Buy, Too Early To Short

With the market a few days away from being overbought I think there is only limited upside to buying from current levels. At the same time I expect a decent turn of the month because equities did so well in July, although there is room for a small dip ahead of that.

I wish I could offer a strong view but there are a lot of mixed signals right now. The economy is weakening but sentiment is still on the pessimistic side, albeit it has moderated. The market is getting overbought but at the same time we are seeing a pickup in M&A and buyback activity. The only theme I feel strongly about is that cheap, defensive shares should outperform in the months ahead.

The Best Housing Market Indicator

I believe mortgage purchase applications are the best forward looking indicator of housing demand as the first thing people do when buying a house (that is measurable) is apply for a mortgage. The chart below is the 4 week moving average of Mortgage Purchase Applications going back to 1990 by the Calculated Risk blog.

I marked with two arrows the spikes in mortgage applications we saw coincident with the tax credits that the government provided. As one can see applications are now at levels first seen in 1993. The housing market is clearly weakening despite what the recently released backwards looking data is saying.

Healthcare Takes The Lead Again

Healthcare was once again one of the strongest sectors for the second day in a row. While I hold a diversified position in the sector my largest holding by far is Gilead. They issued convertible debt that has weighed on the stock but the effect should wear off in the next few days. They now sit with about $3 billion in cash available for buybacks. If management is to be taken at its word they will be aggressively using that pile to buy back shares. Have a good night.

What I Want To See Before Going Short

The following are things I would ideally like to see before going short:
  • Genzyme will likely be taken over for around $20 billion in cash and the announcement will likely give the market a boost. I would want to get this bullish event out of the way and wait until a few days after the announcement.
  • I would like the turn of the month to pass as I outlined this morning.
  • Rydex traders turn neutral at minimum. They are still positioned very bearishly.
  • Sentiment surveys and put/call ratios showing the crowd is once again bullish.
  • Hedge fund surveys showing that hedge funds have re-risked.

Euro Gold

The last leg higher in gold was fueled by fear about the Euro, likely largely driven by Europeans looking to diversify. With the Euro trading sharply higher recently the buyers are facing a double whammy of lower gold in dollar terms and a stronger Euro. Those European buyers are learning that its better to buy insurance during times of calm than during an emergency.

Repurchased Gilead Covered Calls

Last week I wrote covered calls against my Gilead position. I bought back those calls today at a small gain. I am taking a longer view on the stock, even though we might see short term weakness.

Under Pressure

Gilead has been under pressure for the past couple of days due to the issue of convertible debt in order to facilitate their stock buyback. Initially the buyers of the convertible debt are likely to hedge by shorting Gilead stock. But the net effect of the buyback and the issuance of the debt will be a large positive. I remain very bullish on the name and very long.

To Fade Or Not To Fade

As I outlined earlier I don't expect the market to have a sustained move lower until after the turn of the month. But a gap up after a strong run is very tempting for an uber short term fade attempt. I am debating the issue but will probably pass as I don't like to trade the very short term.

Behind The Numbers

Looking at the chart of the 10 Day moving average of the NYSE Advancers - Decliners may lead one to conclude that we are overbought.
 That is until one looks at the raw data that goes into calculating it. I highlighted in orange the numbers the moving average will be dropping over the course of the week. Today, a large number will be dropping but for the remainder of the week we will be dropping negative numbers.

This would imply that we will be maximum overbought at the end of the day on Friday. But because Monday is the first day of the month I am leaning towards waiting until Tuesday of next week before getting bearish.

Bull Time

We are in some sort of move higher that is unlikely to end until we pass the turn of the month. We have had a rather sharp move up and there is a chance of a temporary setback. In most cases there is a down day or two nestled within an up move. If the market acts as it has in the past year then there might not be any down days.

Any move lower before the turn of the month would likely be a buying opportunity and not the start of something bigger. The best the bears can hope for is that the bulls don't make too much progress in the coming week. Turnaround Tuesday of next week is the spot where bears could get aggressive again.

You Can't Make This Stuff Up

Barton Biggs was on Bloomberg today saying he was bullish and 75% net long. He nailed the bottom on July 4 weekend by turning bearish. I have got to hand it to him. He does have cojones. I would have put my tail between my legs and avoided the media for a while after the last call.

Every Dog

The bears had a few too many chances to short into "resistance" today. The battle is not over and a pullback would not be surprising. Healthcare was the leading sector today, even in an up tape. Every dog has its day. Have a good night.

ECRI Leading Index

There is a large debate surrounding what the ECRI leading index is saying. Taken at face value it is saying we are headed into a double dip. However, my understanding is that a large part of the index is based on weekly mortgage applications. A year ago applications were artificially high because of the first time home buyers tax credit. Currently applications are artificially low because demand was stolen forward, similar to the drop off in auto sales immediately following Cash 4 Clunkers. Thus making the year over year rate of change look artificially negative.

I am in the camp that believes the economy is slowing. But the ECRI's indicator might not be working properly at the current juncture so I am not certain that it is a reliable indicator at present as to the trajectory of the decline.

Market Outlook

I don't believe the risk/reward is great for buying or shorting at the current juncture. Those with bullish tendencies might want to wait for a possible pullback as we are right up against resistance and we might still see a pullback early this week. Those with bearish tendencies should probably wait until after the turn of the month even though we could see a pullback this week. I suspect hedge funds are still de-risked and that might give the market a bid as they chase the herd.

More Bullish Healthcare Tidbits

Over the weekend we found out that Glaxo SmithKline made overtures towards Genzyme, in addition to Sanofi. That tells us that there are at least two companies out there looking to make $20 billion acquisitions in healthcare.

Catalysts + Cheap = Rare Opportunity

I believe that large cap biotech stocks are in a uniquely bullish situation. The stocks are cheap and there are a number of catalysts on the horizon to take the group higher. There are only four large cap biotech stocks remaining and it seems Genzyme will be taken over. There are multiple suitors and Genzyme's board has a number of seats with activist investors in it.

The price being talked about for Genzyme's takeover  would represent 20% of the market cap of the remaining three large cap biotech companies. If a portion of that money finds its way into the other large cap biotech stocks the sector would receive a huge boost. Additionally, Gilead and Biogen are repurchasing a large percentage of their shares outstanding. Amgen has been a steady buyer of its own stock over the past few years as well. While mo-mo investors might be selling these stocks, much stronger hands are buying. The type that never sell.

Cash Takeovers

Was it a coincidence that the market took off exactly when it was announced that Sanofi is making a nearly $20 billion bid for Genzyme? Was the rally really about the stress test? There are not many things more bullish than large cash takeovers. They put cash in the hands of stockholders who for the most part turn around and put that cash right back in the market. Have a great weekend.

Just What The Market Needs

If Sanofi does indeed take over Genzyme that should give a nice boost to the market. The deal would be worth close to $20 billion in cash. A large chunk of that cash should find its way into other biotechnology stocks. In my opinion Gilead is a screaming buy right here, given their buyback and this possible takeover.

Has Genzyme Won

Genzyme is flying. It seems that they might be Sanofi's takeover target. This should be good for the entire healthcare sector if it happens. Healthcare is getting killed today and if I were not already long I would be buying now.

Stress Tests

I don't believe that these stress tests hold much importance as nobody is fooled. If they cause a bunch of European banks to raise capital that could be a market negative in the short term as they drain liquidity from the markets.

Too Much Call Buying

The ISE is showing a little too much exuberance in the early going.

Capped On The Upside

Looking out longer term I believe the market is capped on the upside. The government is trying to sell $20 billion in Citigroup over the next few months. They want to do a $10-$20 billion IPO for General Motors. There is over $35 billion in the IPO pipeline as private equity is trying to bring back the LBOs of past. Plus there are a bunch of companies emerging from bankruptcy. In other words there are sellers eagerly waiting.

My Positioning

I am positioned for a range bound market with a slight positive bias. I have my longs hedged with short SPY 108  August Calls.

Treasury Selling More Citigroup

The Treasury announced that it is selling more shares in Citigroup. This is good news for the bears as I estimate these sales will add about $1 billion in supply for each of the next six weeks. Apache did a $3 billion offering  last night. If we start seeing supply in the secondary market the bulls might have trouble making much progress even if sentiment does improve.

Reader Mailbag

On the message board reader PJ asked:
Don't you think the market may be adding to its overbought status? Call buying has been high the last 3 days, unlike the earlier buying. A/D line almost steady on a 10-day average but at a new high as a 12-day average.

Seems like we may have to get past the European stress tests to get a read on the market.
My reply was:

We have essentially gone sideways for seven trading days. The S&P 500 closed at 1095 on July 13 and is at 1093 today. We are dropping 3 up days in the next 3 days and after that the market will have largely worked the overbought reading off.

The fact that the market has been able to hang in with the market overbought is a sign of strength. Sentiment does not seem to be an obstacle as the II survey shows as many bears and bulls, Rydex bears are at an extreme and hedge funds have de-risked.

Not Much New

There is not much new to add this morning. The fact that the market is able to go sideways while working off its overbought reading is a positive for the bulls. There is still time for another pullback in the next few days while the market is overbought but it probably one that is worth buying.

Amazon Whiffs

Amazon missed earnings for the first time in memory and Sandisk is having a bad reaction as well. The momentum crowd is taking heat as Netflix disappointed yesterday. This will add an interesting aspect to trading tomorrow. Have a good night.

What The Stock Market Isn't

I hate to sound like a broken record but THE STOCK MARKET IS NOT THE ECONOMY!. There are a number of actors in the stock market. Tracking their movements is the best way to understand what is going on in the stock market. The three most important groups are investors, corporations and private equity.
  • Investors are the largest group. This encompasses everybody from the long term holders like pension funds to day traders. The best way to track this group is sentiment. When sentiment has been positive for a very long time than this group likely does not have a lot of buying power because they probably have spent it. Conversely when this group has been very negative for a long time than they likely have sold and have plenty of dry powder.
  • Corporations can issue stock through secondary offerings or stock options.They can also buy stock through buybacks and cash takeovers.
  • Private equity can buy stock through LBOs or private placements and they can sell stock through IPOs and various other means. While this group is the least important it can be very important at certain times. Private equity helped burst the Internet bubble in 2000 by bringing to market too many Internet IPOs. They also helped cause the stock market bubble in 2007 with LBO activity.

Housing Market Is Weak

The best leading indicator for housing is mortgage purchase applications and they are lingering at 14 year lows. Today's housing data is misleading. That said, the stock market and the economy are not the same thing. While I am very confident that housing market is weak that does not mean the stock market is a short.

Wrote Gilead Calls

I wrote some Gilead calls. My position is outsized and the prudent thing to do is take some off after an over 5% rise since yesterday morning. I expect the stock to continue to rise while they repurchase shares.

Intersting Take

There is an interesting take from Doug Kass at RealMoneySilver.com on Ben Bernanke. He says that if Bernanke realizes that the economy is uncertain than it is probably already priced into markets as Bernanke is usually among the last to realize anything.

See Saw

The market continues to  see saw, rising one day and falling the next. As I have been outlining there is a pull from a weakening economy, while there is a push from an already de-risked investment community. Unlike during the last downturn there are not many over leveraged market particicpants so even if the markets do head lower it will probably be more of a slow grind.

Looking out a few weeks this see saw action favors the bulls as long as it continues. The market is currently overbought and a continuation of this would allow the bulls to work off the overbought condition by going sideways. The bears need to get to work soon if they are going to make something of this overbought reading.


This market is confounding. There is no other way to describe it. Today's destruction makes as much sense as yesterday's ramp. The sidelines continue to be the best place to be until the market works off its overbought reading. Have a good night.

Can I Have A Witness

Please witness the monster moves in Biogen Idec and Genzyme, two biotech stocks that have been aggressively repurchasing shares.

Them Fighting Words

Gilead's management gave strong signals on the conference call last night that they will be aggressively repurchasing shares in the coming months. Here are some tidbits from the transcript provided by Seeking Alpha:

In our current valuations, we have been aggressively leveraging our cash to buy back shares and plan to continue this in the second half of 2010. This is evidenced by the 44 million shares or about $1.7 billion worth of stock we bought and retired during the second quarter.
At our current price if we were to fully execute upon the 5 billion stock repurchase plan, we would have repurchased approximately 18% of our current market cap.
Geoff, as you know, we’ve done accelerated share repurchases. We also have access to the capital market, and clearly capital structure is one thing we continue to look at. As John mentioned, we can’t give specifics, but we’ll have updates for you pretty quickly here in the second half of the year.
So Mark, this is Robin. As we’ve highlighted on slide five, I think our focus in terms of returning shareholder value to investors right now is going to be the share repurchase plan. It doesn’t mean that we would never consider a dividend, but our current thinking is to use the vehicle of share repurchases. What I meant was again it’s very clear as John highlighted that there are current valuations. There is an opportunity with the 5 billion share repurchase program to continue to be aggressive, and potentially even accelerate our repurchase of stock. So we can’t provide details at this point, but we do expect to be up with the update to you in the near future.

Bought Gilead

I have built up a large Gilead position into this morning's dump. The company was talking about a huge share repurchase on yesterday's call. I believe we will be at much higher prices once that repurchase program has taken effect.

More On Healthcare

Due to healthcare reform, the weak Euro and European austerity measures revenue expectations in bio-pharma companies should be reset 5% lower. The stocks have already reset 15% lower and have more than discounted this and have even discounted further cuts which may or may not occur. Valuations in the space were very low before this and are now ridiculously low.

As an example ex-cash Gilead trades at less than 4.5 times peak earnings. They should earn their stock price ex-cash in the next 5 years. Healthcare has always been a growth space that attracted growth investors. There is currently a transition going on in the shareholder base from growth to value. This transition should be accelerated by the share repurchases and consolidation in the space. I believe there will be no looking back once the transition is complete.


In case it was not apparent in my last post I am not advocating buying here as we are still overbought. I was looking at the market a few weeks out. In the short term my opinion remains that the best course of action is to wait on the sidelines until the overbought condition is worked off before taking a position.

Something's Different

Yesterday marked a big change from the pattern of the past few months. Since early May the market has not been able to rally until it was fully oversold. Yesterday, the market rallied despite still being overbought. If the bears don't get this market down quickly than it will mark the first time since April that the bears have not been able to make significant progress with an overbought reading.

With the overbought reading still being in place I would be surprised if the bulls could make much more progress this week. But it will be a victory if they could defend yesterday's low. Than they will be heading into the turn of the month with an oversold reading and the first opportunity to start making higher highs.

Hedge funds have de-risked, the II survey shows entrenched bearishness and Rydex traders are positioned bearishly. There is upside fuel for this market if it could somehow get going.

Bad Day

While I came into the day net long I am having a bad day. My longs are centered in the health care space and Johnson & Johnson is taking the group down hard. They are saying that European austerity plans will hurt European  pharma pricing by mid single digits and total pharma sales by a couple percent.

I sold the group when these European pricing pressures started surfacing and the group has fallen by 10% since. I thought the pricing pressure was priced in but it seems there is no price too low and no multiple too low. I was actually expecting more pressure from Europe but I am clearly in the minority.

The Comfortable Consensus

Today's rally is the reason it does not usually pay to be part of the market consensus. Even when one is correct on the fundamentals, it might already be priced in. I must admit to getting sucked in to the bearish thinking this morning but because I don't make consensus bets I am not short.

Sit Down

Earnings news was truly terrible, especially Goldman and IBM. Add to that call buying and an overbought market. I would not be a buyer here.

Sold Gilead

I sold Gilead for a small gain. I still like the company relative to the market but I don't like the market.

The Canary

I have great respect for Jeremy Grantham and I must admit to ripping off his method of arriving at a fair value on the S&P 500 (approximately 900). Last quarter Jeremy Grantham decided to take a speculative long based on the "liquidity" trade. He just wanted to join the party. In hindsight, that was the canary in the coal mine. If even one of the biggest big picture bears turned positive, based on essentially "a feeling" than the market had sucked in everybody. Even the greats make mistakes and the stock market is a never ending learning process. His excellent quarterly piece is now available on the GMO website.

Goldman's Earnings Low Quality

Goldman increased the value of its stake in the Chinese bank, ICBC, by $905 million because sale restrictions were lifted. Without that increase, earnings for the quarter would have been worse. I am weary of Chinese banks as there is too much political influence in China on who banks lend to and there is a real estate bubble. I will be very surprised if Goldman could pull that money out. Goldman's earnings are worse than they appear.

Consensus Call

I don't like to be part of a growing consensus, but the market is still overbought and there is no reason to be aggressive on the long side until the market is oversold. The market has not been able to rally until it is fully oversold, which might not happen until late next week.

If the bulls are able to hold their ground this week than maybe a rally can start earlier but for now the best course of action is to wait.

Short Celebration

It seems expiration took the market down too much and we had a bounce back today. Unfortunately for the bulls the gains have been taken back in after hours and then some. With the market still overbought the trick for the bulls will be to keep their recent gains until the overbought condition is worked off. It appears they will be challenged tomorrow. Have a good night.


Friday's move straight down probably resulted in some dejavu for the bulls, namely bringing back memories of the 12% move down into July 4 weekend. The coast is certainly not clear, but the good news for the bulls is that we don't seem to be going down that same path again. 

Analyst Nonsense

A few analyst notes stuck out today:
  • Gilead had some data out this weekend that was mixed, but better than feared. The analysts with a buy invariably looked at the data as positive while those at neutral invariably found what not to like. It is an amazing phenomenon that I find regularly.
  • Bank of America was a Goldman Sachs Conviction Buy when the stock trade at $19 three months ago, but at a 25% discount it no longer merits the rating, as the stock was taken off the conviction list today?

Best Case

The market should be corrective this week as we are overbought. If Friday was an anomaly because of expiration we could see a bounce back, but I would not expect much more. The best the bulls can hope for is that we use the corrective period to go sideways rather than down. Than they could make an attempt for higher highs at the turn of the month. The bears are on offense this week so they will want to put as many points on the board as possible.

The range of sentiment readings has changed in recent weeks. Sentiment still seems to be on the negative side but rallies have been failing the second we see a sign of positive sentiment, like the AAII survey last week. This is a big change from earlier in the year when sentiment would need to get extremely positive before we saw a turn. That means being more patient on buys and selling a little earlier on rallies.

Google Is Up To Something

Google announced a $3 billion commercial paper program and a line of credit, even though they have $30 billion in cash and no debt. The only logical explanation is that they plan to spend some of their cash. They can either:
  • Repurchase shares.
  • Pay a dividend 
  • Make a large acquisition
All of these would be a positive for the stock market, especially if they use a large chunk of their cash. My best guess is that they repurchase shares.  I will consider purchasing the shares on further weakness, as a large buyback announcement should give the stock an initial jolt and put a floor under the stock while it is going on.

Reading Is Fundamental

Upon reading the Treasury's press release a few more times my understanding is that they will announce when they are planning to sell more shares of Citigroup. The key sentence is "the plan will terminate on June 30 even if all shares have not been sold by that time". If the plan has been terminated than it would seem a new plan needs to be announced.

Correction On Citigroup

In past posts I said that the government will not sell Citigroup shares for the entire month of July. After rereading the press release I realized that the government said it would not sell during the "blackout period" set by Citigroup starting July 1. This might mean the government was back in the market today. Had I known that I would likely have been short.

Are You Hedged

I thought I was pretty well hedged coming into the day, short the SPY 108 calls against my longs. I planned on putting on a tighter hedge at the end of the day as I was expecting weakness in the coming week. It turns out I wasn't hedged enough as the market fell another 1.3% past where I was hedged. At the end of the day I sold the SPY 108 August Calls against my longs. I was planning on putting on a tighter hedge but with the market down this much I will have to settle for a loose hedge. If the market goes up into the end of the month after a correction next week I might adjust it and tighten the hedge up. Have a great weekend.

Bought Gilead

I bought shares of Gilead Sciences. They are getting pummeled on negative notes from a couple of analysts. At these prices a lot of bad news is priced in.

Paulson's Positions

John Paulson has had a tough first half of the year and there is a chance of a vicious spiral as I have warned about. His two largest positions are GLD and BAC. Both are now trading at around the July lows. If risk markets sell off into the Fall I believe his funds will blow up. I believe he is now in the hands of the market. Unless he has made major changes to his portfolio, which is quite difficult when running a concentrated portfolio that large.

The Bank Stank

The banks surged off of the lows earlier in the month. Many realized that the banks would be able to book accounting profits due to a lowering of reserves. The problem is that there are too many people like myself who will not touch these banks no matter what they claim to earn. So all the people who foresaw the profits have nobody to sell to.

I don't believe the executives at these banks have a clue how to value their loans and neither do I. It doesn't matter what they report, I will not be a buyer. In addition, the housing market has recently taken a nosedive and the economy is slowing. Long rates are down, so net interest margins will be compressed. That is certainly not in second quarter numbers.


In most cases option expiration mutes volatility but once in a blue moon it acts as an accelerant. Today just might be one of those days.


Yesterday's late day rally felt very lethargic given all the good news that poured in. With Google and Bank of America taking it on the chin this morning it might be rough sledding for the market today. Today is option expiration so anything could happen but this rally seems over to me.

Late In The Game

An up market on Monday would be day ten of the rally, which would mean that we have reached maximum overbought. However, the day after options expiration is often weak so a rally today would be close enough. No matter how you cut it, it is getting late in the game for this rally.

As readers know I have mixed feelings about the market. I believe that the economy is weakening but think we could still possibly rally because sentiment is so dreary. I will likely move to a market neutral position or to a  slightly short position and see how far next week's correction takes us. If the correction is contained to 2%-3% than I believe we will likely make a higher high after the correction. If the correction is deeper than a move lower into the Fall may have already started. My best guess is the former as I believe this market still has to suck more people in before heading lower, but I am keeping an open mind.

Waiting Game

While it was looking like a long shot earlier today, it appears the bears might get their maximum overbought condition to short into. I am not excited about the short side but will wait to see how sentiment looks when we are maximum overbought and assess the situation at that point. Have a good night.

BP Reporting No Oil Flowing Into The Gulf

BP is reporting that there is no oil flowing into the gulf. For the trifecta short squeeze they might announce that Bin Laden has been captured.

Goldman Flying

Goldman Sachs is flying on news that the SEC will hold a press conference at 4:45.

Earnings Are Backward Looking

There is a large discrepancy between the recent economic numbers and the earnings reports thus far. Earnings are backward looking and if one waits for CEOs to tell them there is a slowdown than one will probably have already lost a lot of money. CEOs are notoriously over optimistic. As Warren Buffett says, he hasn't met a CEO that wasn't excited about their companies' prospects.

This does not mean that the short side is a slam dunk either. Hedge funds have largely de-risked which makes me wonder who the marginal seller will be. In addition, timing a market downturn is trickier than predicting one. In 2007 the market hit a high in October even though it was painfully obvious that the financial system was falling apart months before that.

Heading Towards A Short Term Top

We are finally headed towards a maximum overbought condition. At the same time investors are finally starting to warm up to the market as the AAII survey bulls jumped to 51%. It would not be surprising to see the market start heading lower Monday or Tuesday of next week.

Investors still seem tepid towards the market and ideally I would like to see more excitement before turning negative. Its possible we get it in the next couple of days. But given the weak seasonality and weakening economy I am not certain we will reach bullish extremes before turning.

On the one hand there is tremendous economic risk and on the other is the possibility that hedge funds decide to re-risk. Tread carefully but if you are inclined towards the bear side we seem headed towards a decent risk/reward setup.

One More Thing

One of the reasons low quality stocks performed so well off of the March 2009 lows was the huge short base at the time. After being burned very badly on those short bets market participants are likely gun shy. I don't believe that short base exists to propel low quality stocks.

Don't Let Intel Lead You Astray

I don't believe that Intel is indicative of the rest of the economy as we are in the midst of an upgrade cycle to Windows 7. In addition, Intel is almost always caught by surprise during turns so their outlook is not worth much to me. The economy is slowing despite what Intel might say. Usually during a rally cyclical stocks outperform but I believe it will be different this time. I expect defensive, cheap, large caps to outperform even in the event of a further rally.

Wrote Pfizer Puts Naked

I wrote the August 14 PFE puts naked for 30 cents.

Mortgae Applications At A 14 Year low

Mortgage applications for purchase have dropped to a 14 year low. Today's data highlights the battle going on in my mind. On the one hand the economy is deteriorating and it is difficult to be bullish with that type of backdrop. On the other hand sentiment is quite negative while the market is rising, which has bullish implications.


The bulls in the Investors Intelligence survey fell from 37% to 32.6% in the latest week. That is quite shocking given the rise in the market and in a vacuum is bullish.

Playing Tight

The recovery rally off of the European scare lows lasted roughly ten trading days right into June option expiration. After expiration the market subsequently turned down and bottomed ten trading days later into July 4 weekend. Today is day seven of the recovery rally off of those lows. In my experience strong moves get tired after ten days at which point we see a correction of that move.

I am hesitant to short a market where the most important players, hedge funds, have de-risked. There is only one way to go from that posture. But if I were to go short I would want to make sure that the market was exhausted and would wait until after expiration. That does not mean we cannot see a turn lower earlier. The S&P 500 shot up 90 points in a straight line at yesterday's after hours highs, so a move lower would not be surprising. But I am not playing anything but a perfect hand on the short side and we are not there yet.

Intel Is Important

In the past few quarters Intel's earnings report was not important as the only question was what the reaction would be to blowout numbers. This time around there is uncertainty surrounding the numbers and I believe tomorrow's market is dependent on Intel.

Intel will surely beat earnings numbers as they set the bar purposefully low. The key will be revenue and revenue guidance. If the numbers are lower than the whispers than it is hard to believe that investors will continue to chase the market without a pause. On the other hand I don't see a strong sell off on a solid revenue beat and solid revenue guidance until after expiration. I have no special insight into Intel's results so I see the current setup as a coin toss.

Alcoa's Earnings

Alcoa has taken so many write downs in the past few years that it would be difficult for them to lose money. They have practically written down their dollar bills to fifty cents. Alcoa is not the reason the market is up but the excuse that the media will use. The reason the market is up is because market participants were caught leaning the wrong way and are now scrambling.

No Love

The S&P 500 has now rallied over 8% from the lows and there is still put buying. What will it take to get the call buyers out?

More Supporting Evidence For The Bulls

I want the stock market to go down because I want to be able to buy stocks at better valuations. I don't believe stocks are set up for good long term returns, especially given that we are headed into a slowdown. But the evidence does not support what I want in the short term.

Sentiment still seems to be too bearish. Rydex traders have barely budged and neither have newsletters. From Marketwatch:
Consider the average recommended equity exposure among a subset of short-term stock market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). As of the close on Friday, July 2, this average stood at minus 1.8% -- which meant that these short-term market timers on average were completely out of any long positions and allocating 1.8% of their equity portfolios to going short.
As of the close on Friday, July 9, one week later, with the Dow 512 points higher, the HSNSI stood at minus 6.5%, or some five percentage points lower.
In other words, the average short-term market timer reacted to this 512-point rally by becoming even more short the market than he was before the rally started.

The Hedge Fund Prayer

Please don't go up anymore,
I just finished derisking,
I don't want to look like a fool,
Please, Please, Please

Please don't go up anymore,
I just want to enjoy the Hamptons,
I just need this one more bonus,
Please, Please, Please

Too Scared To Short

Today's gap up right into resistance is the first decent setup the bears have had in weeks. That said, I have little interest in trying to short this market. I can come up with a whole list of reasons why I am bearish on the economy and only a single reason why one should be bullish on stocks.

Hedge funds have derisked. The more the market rises the greater the chance they will rerisk. If they do so the market could have tremendous upside. It is for that single reason that I have little interest in being short.

My posture is close to neutral due to the fact that I sold the SPY 108 Calls against my longs. I will likely just sit on my hands until Intel releases results.

Fade Intel's News

Nothing about today has changed the market's outlook. If anything the bulls have managed to digest some of last week's gains. It is likely that Intel will determine the next major move in the market with a potential for a big move either way.  It might pay to fade that move, whichever way it is.

I expect earnings season to be mixed with something for both bulls and bears. If the market rockets higher on Intel's earnings I believe it will pay to go short as there will be companies that disappoint. By the same token if the market is very weak on Intel's earnings I believe the market is buyable as there will be good news from other companies. Have a good night.

Bargain Hunting In Wal Mart

Wal Mart was recommended in Barrons this weekend as well as by Jeff Saut in his weekly missive. Wal Mart trades at a little over 12 times this years projected earnings which does seem like a bargain for a company that has steadily increased earning through good times and bad. In addition, they installed new management that will treat Wal Mart like the mature business it is rather than spending on growth initiatives.

I have also been considering Wal Mart in recent weeks but am concerned about some short term issues. The main issue is that extended unemployment has been cut off for millions of Americans. This is likely to hit Wal Mart customers disproportionately. In addition, there appear to be price wars at the low end.  Same store sales in the US have been negative and recent growth has come from overseas. The stronger dollar might mute those overseas profits.

Even considering all these near term issues the stock is probably cheap. The problem is that I am not sure that these issues have been recognized yet by investors. I would be much more comfortable buying once the bad news is out in the open.

Expiration Week

In isolation the fact that this is expiration week makes it less likely that we see a turn lower. Trends have tended to persist through expiration and currently the short term trend is higher. In general, the indicators favor a higher market through the end of this week. Sentiment indicators still show a high level of negativity and the market will not be overbought until after expiration.

That said, we have shot up 70 points and I am growing a little weary. While the indicators are not showing it yet sentiment has definitely improved and as I outlined yesterday, I am feeling more neutral despite the positive indicators. The move lower this morning is definitely better for those that want to play the upside than a gap higher but I don't see a great setup.


I believe the easy trade on the long side is now over. Normally, a powerful rally coming off of such an oversold condition should be given more time. But given the weakening economy, the weak seasonality and the strange way the market has been trading I would err on the side of caution. I might let some positions run but am not considering adding anything new.

There is little in the short term suggesting that the market should be shorted either. The best thing the bulls have going for them is how few actually believe in this rally. It has also been short in duration and it would not be surprising if we did not see a meaty pullback until after expiration. In short, the sidelines are not a bad place to be.

An Important Issue

Millions of Americans are losing their extended unemployment benefits as Congress has not been able to pass an extension. Most of the unemployed use their unemployment checks immediately so there is a tremendous short term bang from this type of stimulus. Its sudden disappearance will be felt very quickly throughout the economy.

Congress returns from vacation this week and is in a bind. They want to stimulate the economy before the elections but many don't want to vote for any more bailouts and stimulus packages as it is being used against them in campaigns. I believe it is imperative for the bull case that these benefits be extended by Congress otherwise the chances of this being something more than an oversold rally becomes very slim.

In the long run by passing these types of stimulus we might be delaying the inevitable. But every rally in the past decade has been about delaying the inevitable.

A Summer Friday It Is

I can't say I'm upset to see a boring market today. I am calling it a week. Have a great weekend.

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Gap Fill

The gap at 1074 on the S&P 500 has been filled from that huge down day two weeks back. This might be a place where shorts might try their luck or longs take profits. I would not be chasing.

Avoid Paulson's Positions

It has recently been reported that John Paulson has suffered $2 billion in redemptions after a poor performance this year. At his height he was managing over $33 billion. I suspect there is a lot of hot money in his funds and those guys don't stick around. To make it worse he runs a concentrated portfolio. This is a very difficult situation for a large fund to get out of. I would avoid his positions as I doubt he is buying more. Here is a link to his 13-F.

Just The Facts

We have shot up 60 S&P points off the lows and as of this writing it appears the market is poised to rise again today.  Markets that move in a single direction make me feel uneasy as I prefer a two steps forward, one step back type of market.

While the market is starting to make me feel uneasy there is nothing in the indicators that I look at to support my fears. Rydex traders are still stubbornly bearish and have barely budged despite the markets monster move. The market is no longer as short term oversold as it was but will not be overbought until after expiration. The data from the put/call ratio is what one would expect coincident with a 6% rise. Anecdotally, it seems people have become more bullish but I am not sure how many have actually acted on it.

I sold some SPY 108 calls as a hedge against my longs so my position is becoming smaller as the market rises. I am very tempted to go completely to cash but the facts don't support that move.

Heading Into A Summer Friday

Barring terrible overnight news it looks like the bears are going to have to wait until next week. Tomorrow will be a slow Summer Friday and there will be too many traders eager to buy the first dip. It is looking increasingly like the bulls have the ball until expiration. Have a good night.

The AAII Survey Is Not A Long Term Indicator

Barry Ritholtz wrote a blog post knocking the AAII survey as a bad timing tool. He brings up two examples where the bull and bear spread were high, November 27, 2008 and July 20, 2006. While in both cases the market eventually went lower they were actually great times to buy in the short run.

The market bottomed right around November 27,2008 before shooting up 20% into early January 2009. Sure the market went lower into March but that was a very tradable rally. In the case of July 20, 2006 a powerful rally was launched that lasted through January of 2007. Yes, we are lower than that point today but a six month rally is nothing to sneeze at and it took two years before we cracked the July 2006 levels.

The AAII survey is not a long term timing tool and nobody ever claimed it was. Like any other indicator it is not perfect but can provide useful clues.

No Liquidity

An explanation for the recent crazy moves might be the lack of liquidity. When hedge funds are trying to get out of positions they are driving the market lower and vice versa. As an example look at Gap Stores, which is down over 8% today. They missed numbers but the stock already traded down hard in anticipation of the numbers. No matter, those who want liquidity in exchange for their Gap shares will pay a steep price today.

There was a time when hedge funds were a small group and were able to take advantage of slow moving mutual funds and retail investors. But now they are the big fish and are being slowly eaten by flash trading algorithms.  

At Midday

At midday the call buyers have backed off and the market is up slightly. This is what the bulls want to see. I would be surprised if the bulls don't eventually get this market to 1074.

The Initial Dips

The initial dips will likely be bought by those caught on the wrong side of yesterday's move and those that missed it. Even if this market is destined to roll over I would be surprised if we saw any major downside this week. Some sideways action would not be surprising.

Economy Not A Reason To Be Bullish

There are reasons to be bullish but the economy is not one of them despite this morning's jobless claims data. There are serious headwinds hitting the economy.
  • The expiration of the housing tax credit.
  • Stricter FHA rules which is now the main lender for the housing market.
  • Municipal austerity measures.
  • Extended unemployment claims running out.
  • Mortgage resets hitting.

Another Extreme

The AAII bullish percentage reached 21%. That roughly equals the lows of the financial meltdown. Individual investors are extremely pessimistic with the caveat that the survey was taken before yesterday's rally. That is in addition to traders being extremely negative and newsletter writers. I am not very optimistic about the economy but I also don't enter crowded trades, so the short side is not an option for me. 

The Level

I don't often discuss levels in the market because I prefer to look at indicators that deal with time or sentiment. But 1074 on the S&P 500 strikes me as an important level, especially if this rally continues unabated. That is where we gapped down from on the day of the massacre last week. It seems like a level where bulls would take profits and bears who covered might start to reestablish positions. It should at least make the market pause if we get there.

Rydex Traders Stay Put

Despite a 3% rise in the stock market Rydex traders stayed firmly bearish. Usually the downside is contained until they relent and move to a more neutral posture. Last month's snapback rally lasted right through options expiration and it looks like that might occur again this month.

Looking at the intermediate term picture, there is fuel available for a rally. Hedge funds have derisked and if the market starts rising they could be forced back into the market. If we start seeing M&A and buyback activity pick up in the next few weeks than I believe that could force the hands of hedge funds. However, if that does not occur a slowing economy could mean a trading range or even a puncturing of recent lows.

For now, I am holding on to my longs with an eye on the door. I will be looking at my short term signals as well as looking to see if the bullish scenario I outlined above starts to play out.

The Black Crossover Head and Shoulder Boulder

I have written the SPY 108 calls against my long positions. As is the fate of most technical signals that make the front page of the newspaper the "Black Cross" was actually the "Black Killer Crossover", an ancient Japanese Toro trick, where a tuna turns out to be a bull. And the "Head and Shoulders" top was actually the "Head and Shoulder Boulder" taught to the bulls by no other than the Road Runner. Have a good night.

Momentum Cuts Both Ways

The momentum on the move lower was remarkable with nary even a bounce. While I am not calling for a straight move up, it is certainly not outside the realm of possibilities.

Is Rydex Representative

If the positioning of Rydex traders is any indication of how other traders are positioned than the shorts have grown very bold. Even if we have begun a new bear market these shorts are likely to be cleared out before another leg lower.

Somebody Will Take The Cheap Money

I have been expecting to hear about cash takeovers or LBO activity but a deal has yet to materialize. Corporate spreads are tight, while bond yields are low and stocks are down, making this the best time for takeovers in years. While stock prices were lower during the crisis funding was not as readily available. Cheap money is being handed out and in my experience somebody will take it. An M&A boom would be very bullish for the market.

So Bearish, Its Bullish

I wanted to highlight some bullish indicators that I am seeing:
  • The II survey is out and the bulls are at 37% while the bears are at 35%. Bears are at levels seen at the July 2009 lows. Can it get get more extreme? Sure, but these are pretty extreme numbers and it is certainly extreme enough for a rally.
  • Rydex traders grew more bearish yesterday and are as bearish as they were at the July 2009 lows. The only time we saw them get much more bearish was late 2008 and early 2009.
  • We have had several anecdotal clues as over the weekend Bloomberg highlighted bull turned bear Barton Biggs. The New York Times highlighted Robert Prechter and Nouriel Roubini hosted Squawk Box. I hear the Grim Reaper will be on Fast Money tonight.
  • The market is deeply oversold on a short term basis.

Real or Memorex

Usually these rallies lure investors to the bull camp before they are over.  Nobody was fooled by today's "fake" rally. Which makes me wonder if it has further to go. If we see some cash M&A activity it might have further to go than most think possible. Have a good night.

Wintel's Future

During the recent market downturn both Intel and Microsoft have traded down to less than ten times earnings net of cash. While one can point to companies with lower multiples, they are usually companies that are more capital intensive and do not throw off the free cash flow of a Microsoft or Intel.

Normally these stocks would be no brainers at these valuation levels but there are secular issues with both stocks. For many years people mused that the Microsoft stronghold could be broken by Linux but Linux never really took off with the mainstream. Now we are seeing tablets with iPhone and Android based operating systems and consumers are willing to buy it. This is the first real threat to the Microsoft monopoly.

For a while Intel did not care who won Apple or Microsoft as they were supplying chips for both companies. Now as tablets take off companies have other options. Apple has created their own chip for the iPad. Qualcomm and Broadcom both have alternatives for these lighter computers.

Intel and Microsoft's stocks are certainly not pricing in the type of monopoly that they have held in the past. My guess is that both stocks are buyable at current valuation levels but they are not slam dunks as there are real threats to both parties long standing monopolies.

Indicators In Transition

Some readers have asked for an update of my indicators. I have not referred to them so much lately because they seem to be in transition. The ranges vary during different markets and we are no longer in the type of market we were in since March 2009. That said some indicators have even become extreme using the 2008 Bear Market ranges. I suspect the current range will fall somewhere in between. One indicator that is not shown is Rydex traders, which are leaning heavily bearish. That is usually a good sign for the short term.

The Frontrunner

Allergan seems to be the frontrunner for the Sanofi takeover target, as it is up another 1.5% today. The market is usually correct in assessing these situations.

Interpreting The Clues

The heavy call buying at the ISE is not necessarily a bad thing, especially because the market is so strong. After a long downtrend heavy call buying is often seen at the kickoff to a rally.

Oversold Rally Or More?

As I took a step back over the weekend, I was starting to feel more constructive towards the market. As I wrote over the weekend too many market participants are now positioned for a decline and even some of the most fervent bulls have turned tail.

I was strongly considering expanding longs but a large gap up was not what I was hoping for. A weakening economy makes it difficult to chase the market so I will likely just stick with my current exposure. If we did see some large cash M&A deals I would be more comfortable adding exposure, even at these levels or slightly higher.

Corporate investment grade spreads are still pretty tight and absolute corporate borrowing costs are scraping record lows. With stocks off significantly that makes acquisitions relatively more attractive than they have been in a while. If this does lead to cash M&A activity I think we could see more than just an oversold rally.

Long Weekend Thought

Consider the following items
  1. Hedge funds have largely derisked. 
  2. Rydex traders are at their largest bearish position in over a year, roughly equaling their short positions at the July 2009 lows. This is a new development as of Friday's close. 
  3. Sentiment surveys are showing a pretty negative retail crowd and that was before last week's carnage.
  4. Its not difficult to guess which way the momentum based black boxes are leaning
If the stock market goes down much more it would seemingly oblige pretty much everyone. Since when does the market do that?

    Are You Kidding Me

    On a slow weekend one of the Bloomberg headlines has been that market guru Barton Biggs has turned bearish. From Bloomberg:
    Concern governments around the world are curtailing stimulus measures too soon spurred Barton Biggs to sell about half of his stock investments this week
    “The economic numbers are very disappointing,” Biggs said. “Maybe the politicians respond. I’m worried that we could have not just a soft patch but a double dip which lasts two or three quarters and where nominal GDP is only up 2 or 3 percent, and that’ll have a big effect on profits. I’m afraid the market goes down another 10 or 15 percent if that happens.”
    Before you go shorting the market on Biggs prognostications note the following. Near the highs of the market on April 30 Bloomberg quoted Barton Biggs:
    “The earnings are really coming in strong in the U.S.,” Biggs, who runs New York-based hedge fund Traxis Partners LP, said in an interview with Bloomberg Television today. “I’m still very positive.”  

    On May 12 Bloomberg ran the story Biggs Says U.S. Stocks May Rise 20% Led by Technology, which is pretty self explanaotory.

    On May 27 Biggs was quoted in Bloomberg:
    “I think they’re going to stabilize in this general area, and then we’re going to have a significant move to the upside,"
    Bloomberg said Biggs was bullish as late as June 30. When the guys who were most bullish at the top and stayed bullish the whole way down, suddenly turn bearish my contrarian antennae start to tingle.

    Signing Off

    I am signing off for the day. Once again it is not looking pretty for the bulls. The bulls need a miracle over the weekend or a blockbuster deal. Have a great weekend and a Happy July 4th.

    Shifted To Healthcare

    All my long exposure is now in healthcare.

    A Big Change

    We are seeing a big change today. The market is flattish and we are seeing put buying. This does not necessarily mean that we will rally but increases the odds that if we do test yesterday's lows that they will hold.

    Pulled The Trigger

    I bought the healthcare ETF XLV this morning at 28.10. I have been eyeing healthcare lately as the stocks seem to be discounting the kitchen sink. I was scared to pull the trigger because the stocks have been in freefall.The Sanofi report this morning was the final straw. The majority of the money from a deal would likely flow into other  healthcare companies. I will be looking to cut other longs over the course of the day to make room for this position.

    A Warning For The Bears

    I understand the desire of the bears to short a bounce. It is for the same reason that I am strongly considering exiting my remaining longs on a bounce. However, if we walk in on Tuesday morning and a mega deal is announced I believe that the lows are in. That said, it seems that the deal is in the earlier stages and this is not the likeliest outcome.

    Bloomberg is reporting that the potential Sanofi deal will be in the $20 billion range. According to TrimTabs 50% of the benefit of a deal is seen in the week a deal is announced and 50% is seen at closing. That would mean there would be $10 billion freed up to go into other stocks as arbs buy the stock from conventional holders. In addition, the Millipore deal is scheduled to close as early as next week, which is a $6 billion deal.

    According to trim Tab's formula the net inflow into the market would be $13 billion. With that type of inflow the bears might be fighting an uphill battle.

    The Problem With This Market

    Yesterday, I spoke about how the bears were not pressing their luck and how that made me a little reluctant to call a bottom. If there were a decent short base this market would be flying on these Jobs numbers. I suspect we are starting to build a short base as bears are looking to short bounces but I don't think we are there yet.

    Is This A "Selling Stampede"

    There are two possibilities for the current market. The first is that we have bottomed or that we put in a bottom in the next couple of days and then have a typical 10 day rally that lasts into option expiration. Of course that does not mean it would be straight up. The second is that we are in the midst of a "selling stampede". Jeff Saut of Raymond James has coined the term "selling stampede". According to Jeff Saut:
    such stampedes tend to last 17 to 25 sessions, with only one- to three-session counter-trend rallies, before they exhaust themselves on the downside
    So which is it? The recent decline has been unlike anything I have seen. The market has fallen top to bottom 12% in less than nine days. There have been some bad economic reports but no crisis that is responsible for the decline and debt markets are pretty calm all things considered. The market was short term overbought when the decline started but sentiment was not stretched by any measure and we were oversold in the intermediate term. Despite that the move has been straight down without even a bounce until yesterday.

    Given that the current decline is different from anything I can recall, I don't have a strong opinion on whether this is a selling stampede or not. If we do get a bounce I might just jettison the balance of my longs and play it on the safe side.

    Sanofi On The Hunt

    Yesterday, in my article Bull Case Possibilities, I wrote
    A lot of the large European health care companies have huge piles of cash. They have been very slow in spending it but some US biotech companies are trading at very reasonable levels. An acquisition of a company like Gilead is a possibility now that the stock has fallen so far. More likely someone will take over Biogen or Genzyme which are already dressed up for the dance.
     This morning Bloomberg is out with the following story:

    Sanofi-Aventis SA, France’s biggest drugmaker, is preparing a major acquisition in the U.S., according to five people with knowledge of the situation.
    Chief Executive Officer Chris Viehbacher briefed the board on the transaction at a special meeting this week, said two of the people, who declined to be identified because the plan is confidential. The process is in very early stages and an agreement with the unidentified target may not be reached, the people said.

    The Perfect Bottom

    No bottom is perfect as one can always find some indicator that is not lining up. There are some ingredients missing here that would make a bottom easier to call:
    • We are not seeing the bears press too hard. Its always better when the bears are pushing things too far but anecdotally it does not seem like they are. 
    • The second the market started rallying the call buyers came out of the woodwork again on the ISE
    But its also possible to make a decent case that we already saw the bottom:
    • Equity allocation levels are low at the hedge fund and at the institutional level.
    • In the AAII survey the bulls were at levels seen at major bottoms showing that the individual investor is not very bullish either.
    • We definitely had a whoosh lower and some panic (thank me later).
    • The CBOE put/call was fairly high today.
    • Today is day nine of the decline. It is quite unusual for a decline to go much longer. 
    All in all it seems to me that we are a lot closer to some sort of a bottom after an 11% + decline but it would not be so surprising if this had a little more to go. 

    Bull Case Possibilities

    I mentioned in my previous article, The Bull Case that many companies had strong free cash flow and were trading at reasonable prices. The question is how does that translate into actual gains for the market. Obviously a lot of buybacks and takeovers would help but some nice blockbuster deals would speed things up. The following blockbuster deals could help stabilize markets beyond just a relief rally. These are not predictions, just possibilities:
    • Nestle is receiving $25 billion in cash from its sale of Alcon to Novartis. They have already stated that they are looking to do a large acquisition. A blockbuster acquisition of a US company would give a much needed cash injection to the stock market.
    • Google has $90 a share in cash or $28 billion. Ex-cash their stock trades at about 12 times. A share buyback makes sense, following their search brethren Yahoo who announced a $3 billion share repurchase yesterday. 
    • Steve Jobs has made fun of companies that repurchase stock so a share repurchase is unlikely. However, it does not make sense to hold over $25 billion in cash. A one time dividend or large acquisition might be more likely.
    • A lot of the large European health care companies have huge piles of cash. They have been very slow in spending it but some US biotech companies are trading at very reasonable levels. An acquisition of a company like Gilead is a possibility now that the stock has fallen so far. More likely someone will take over Biogen or Genzyme which are already dressed up for the dance.

    The Bull Case

    The bull case is that while there might be a double dip, stocks are already pricing a lot in. It is unlikely that we will see the type of forced selling that we saw during the last bear market as the major players are no longer leveraged. There are many low price to free cash flow companies that can buy back stock or buy other companies. At the same time investors and hedge funds have low equity allocations. The question becomes where will the selling come from?

    I believe the economy will get much worse over the course of the Summer. That is enough to keep me away from the long side for anything more than a trade. But the bull case has merit and I don't think the short side is a slam dunk either. A few weeks ago I said the best course of action for most investors is to stand aside this Summer and if the market falls apart to come back in the Fall and pick up the pieces. I wish I would have followed my own advice. Sitting on ones hands is the most important and hardest things to do in investing.

    Another Positive

    Another positive is that they are finally selling gold. It has been a good hiding spot during the recent storm. They usually get the hiding spots towards the end when people are selling whatever they can.

    Put Buying at CBOE Picking Up

    The put buying at the CBOE is finally picking up. The ISE is still more muted but there is no longer call buying.

    I Puked

    I puked up my SPY long. The lack of put buying is bewildering and scaring me. The market is welcome to rally now. I remain short SPY puts.

    We Get It

    Another disappointing jobless claims number was probably the best thing that could happen for the bulls. At this point nobody in their right mind is expecting anything but a terrible number tomorrow.  With expectations as low as they are now it will take one whopper of a number to surprise anybody. Except for economists who still have not lowered their estimates as their models say everything is a-ok.


    The current brouhaha about "Death Crosses", "Head and Shoulder Tops" and "Dow Theory Sell Signals" is eerily reminiscent of the period a little over a year ago when the S&P 500 first crossed the 200 day moving average.

    The S&P 500 first crossed its 200 day moving average, with the S&P 500 at around 920. It was all anybody could talk about. Initially the S&P 500 shot up to the 950 area before a stiff correction where the S&P 500 hit 870. At that point the talk was about a "Head and Shoulders" top. The market proceeded to zoom up and cross the 200 day moving average a second time. However, at that point nobody said a peep about it and the market didn't look back until now.

    The Bad and The Good About Sentiment

    The biggest problem for the bulls is sentiment. Sentiment is negative as even the few who are bullish are extremely hesitant. Normally this would be good for a rally, but the problem is that the market has fallen 10% since last Monday. Given the size of the drop I would have expected sentiment to be even more negative and to see more panic.

    As an example the put/call ratios are showing pessimism and a little panic but not 10% drop in a week pessimism and panic. The good news is that the few remaining bulls are starting to get nervous and the bears are growing increasingly confident. If we do have another leg down sentiment will likely be in place for a good snapback rally.