Happy Holidays

Not thinking too hard continues to be the proper posture in the current market. Happy Passover and an early Happy Easter. I will be out for the next two days and will return Thursday.

Complacency Reigns Supreme

My largest gripe with this market is not so much that everyone is so bullish, but that nobody is scared. Very few feel that there is much danger in the stock market at the current juncture. That really bothers me as the market is inherently risky and normally this prevailing view would cause me to hold a very large short position. However, we are heading into one of those seasonally strong holiday periods where it rarely pays to be short. I am going to stick with my small short position for now.

How Bullish Can You Get

The Big Picture has a chart of the ISI Institutional Equity Manager Survey. Folks, they don't get much more bullish than this.

Treasuries Creepin' While Your Sleepin'

Treasuries are very quietly breaking down to new lows after a feeble bounce attempt late last week.

Run The Other Way

Interoil (ticker symbol : IOC) dropped sharply on Friday on accusations that the company is a fraud. I have not done any research on this company other than looking at the accusations and the companies response. The following statement stuck out from the companies press  release:
The article was timed to benefit recent short selling activities.  The "short" interest in InterOil increased to 3,548,056 shares in mid-March.
My experience is that anytime a company attacks the short sellers one should run as far away from the company as one could.

Another funny passage from the press release  is:
Operations conducted by the company which were evaluated by independent engineering evaluations consultants, GLJ Petroleum Consultants Ltd., resulted in an increase in our gross best case contingent resources estimate by 889 million barrels of oil equivalent resources, to a revised total of 8.2 tcf of natural gas and 156 million barrels of condensate, in the past fiscal year.
What in the world is "gross best case contingent"?

Ford Secondary

The UAW is selling Ford warrants tomorrow that will be the equivalent of a $2 billion + offering by my very rough calculation. Ford has been a very strong momentum stock recently. It will be interesting to see how it holds up in the face of the supply.

The Bear Case And The Bull Case: Part 2

In Part 1 I made the bear case and the following is the bull case
  1. The turn of the month from March to April is one of the seasonally strongest times of the year. 
  2. In the past two weeks the market has gone sideways and worked off the short term overbought reading setting up for a continued move higher.

  3. According to most surveys hedge funds are pretty long heading into quarter end as are mutual funds. The powers that be would be very happy with a strong end to the quarter. 
  4. 1150 on the S&P 500 is very strong support and is not that far away.

The Bear Case And The Bull Case: Part 1

I am going to start by making the bear case in Part 1 of this article, with Part 2 making the bull case.
  1. The ISE Equity only 10 day moving average has started heading downward from the top of the page.
  2. The CBOE Equity only 10 day moving average has curled up from the bottom of the page (Please note a high ISE reading indicates heavy call buying, while a low CBOE reading indicates heavy call activity).
  3. The 30 Day moving average of the NYSE Advancers - Decliners has started heading down from the top of the page.                                                           .
  4. Rydex traders are about as bullishly positioned as they could possibly be. Unfortunately, I don't keep a chart as I view it on Sentimentrader.com, a paid site.

One Tough Market

I took a small short position early last week at levels slightly below where we sit today. A confluence of indicators were at levels that had previously led to corrections.  I would expect to make money in 9 out of 10 situations where so many indicators lined up. However, the more time that passes the less conviction I have that we will get a meaty correction.

I will be looking for an opportunity to flatten out on Monday as I have very little conviction as to the near term direction of the market. As I wrote this morning, I would view a rally into late April as a gift to get short. What happens between now and late April is the tougher call. Have a great weekend.

The Turning Point For Beta

My last post got me thinking and I can't help but suspect that quarter end has something to do with the move in high beta stocks. This might be the result of window dressing or just a repositioning of portfolios for the new quarter. There is a decent chance that by the time the new quarter rolls around the rotation will be done as everyone will have already repositioned or window dressed.

The Move Into Beta

The only thing that is more amazing than the persistence of this move is the persistence of the rotation into high beta stocks. This comment might fly over the head of many as it took me many years of trading before I noticed how money rotates from sector to sector. I don't think I have ever seen such a persistent rotation into high beta stocks without a break.

Under The Weather

I am extremely tempted to put out the shorts I covered at the end of the day yesterday but am feeling under the weather today so I will take a pass.

Why Is This Pullback Different

Every pullback in the last six weeks has been a one day wonder or better yet a half day wonder. After almost every pullback we would see the bears come out of their cave and declare the beginning of a correction. Today we are seeing heavy call buying as everyone has learned to buy the dip.

Heading Towards A Lasting Top

In the very short term I don't believe that the market is done correcting. Sentiment has become so stretched that the bulls should get a gut check at minimum. I expect we will see another down day either today or Monday. After that the near term outlook becomes a lot murkier as I could make an argument for both the bulls and bears.

If the market does manage to rally into late April I believe it would be an exquisite shorting opportunity. And I am not talking about the type of opportunity where I short in the morning and cover in the afternoon.  I believe the top for 2010 would be in. These are the reasons:
  • The government will start selling Citigroup shares in late April.
  • Positive seasonality becomes negative seasonality.
  • If we rallied into late April, could you imagine how stretched sentiment would be on both a short and intermediate term basis?
  • Quantitative easing ends this month.
  • Another wave of mortgage resets is starting.
  • In the latter half of the year stimulus becomes a net negative year over year.
  • Comps become tougher.
  • Municipal and sovereign imbalances are getting worse.
I can go on but you get the point. 

Covered Some SPY

I covered the SPY short I put on this morning. I am back to a small net short position.

Sun Trust Secondary

In the past two days Sun Trust has made major management changes. Today, the stock is down even though the regional banks are up strongly. Is a secondary being sniffed out?

Another Bad Auction

There was another bad treasury auction today. With Google angering the Chinese and the US about to label China a currency manipulator one has to wonder whether someone is being taught a lesson.

Next Stop, Two Year Lows

Treasuries fell through their six month lows like a hot knife through butter. Next up are two and a half year lows that are about a percent away. After that treasuries have a long way down before reaching support.

Treasuries Testing Lows

Treasuries are testing 6 month lows now but who cares.

Mea Culpa

I stopped myself out of my Gilead trade but am going to keep the short SPY side of the trade on. My short position is now medium sized.

Added To Gilead

I have added to Gilead Sciences and shorted SPY against it.

Am I The Crazy One

If I were holding a position where I knew that the largest holder was about to sell over $30 billion worth of my stock I would get out of dodge. I would not have a second thought about it. Yet Citigroup is trading up on the news that the government is selling. Am I the crazy one?

Government Selling Citi Shares Over Time

According to Bloomberg the government will start selling shares of Citigroup in the latter half of April and get rid of the position over the course of the year. Late April was around the time I was looking for a lasting top in the broader market and this strengthens the chances of that being the timing.

I still believe there is room for a correction now, but I don't believe that it will be of the magnitude we saw in January. I though that if the government sold their Citigroup shares in the coming days we could see that type of correction but that scenario seems to be off the table.

Interest Rates Don't Matter

Treasuries have closed within spitting distance of a 6 month low and are within a couple of percent of two year lows. I believe there is a possibility for a breakout in rates. That would negatively effect the stock market and economy.

I could just hear the momentum worshipers saying that rates don't matter the next time we have an up day. Tell it to my grandma. Nothing matters more than rates in a finance based economy. Have a good night.

Not This Time

The last few times treasuries were in this area I shorted TBT as a way to gain long treasury exposure. The reason I did so was because negative sentiment on treasuries was extreme. Everyone and their mother was recommending a short treasury trade so I went long.

We are currently sitting less than a percent away from a new six month low and sentiment is not extreme this time around. I haven't heard a call to short treasuries in a long time. This time around could be the real thing. Higher rates would not be good for the economy or stock market.

Discounting Schmechanism

Home sales have gradually become weaker since the original first time home buyer tax credit expired. The credit was renewed but but the original offer stole demand from the future and sales have dipped anyway. The current credit expires in April and will not be renewed again.

There was a surge in home sales as the original tax credit was reaching expiration. Under the new tax credit contracts must be signed by the end of April and the deals must close by the end of June in order to qualify.  This could cause another wave of home sales, albeit not as large as from the original offer.

It is quite obvious to me that as the tax credit expires we will see a pickup in home sales.That should lead to a drop off once the tax credit expires that puts as at lower levels of home sales than current rates.

The stock market was once rumored to be a discounting mechanism that looks through these type of events. I am not certain that is the case any longer. If the better home sales in the coming months is celebrated and not seen as a one time event I believe that strength could be shorted.

My New Favorite Healthcare Pick

I have been getting a lot of questions recently on where I would put new money in healthcare. The answer to that question has been Pfizer. Now that Pfizer had had a nice rally, while Gilead is getting hit up I am more partial to Gilead.

Treasuries Getting Smoked

The thing that is jumping off of my screen this morning is that treasuries are getting smoked. The move seems unusual in light of the lower futures. While current interest rate levels do not seem to be hurting the economy a strong sell off from these levels might start to do some damage.

Intelligent Investors Growing Bullish

The Investors Intelligence numbers came in showing the bulls growing to 49%, which is slightly below the 52% number we saw in January. The bears chimed in at 20.5%. I have found that when the bears are at 20% or below it generally signals danger ahead for the market.

If the survey were taken after the close yesterday I suspect the numbers would be even more extreme. I know that it seems like the market can't go down right now. Believe me when I say I feel it as well. It always feels this way at tops. Six weeks ago buying in the midst of the Greek crisis felt so wrong but I did it anyway and selling now feels just as wrong.

No Selling

The march higher continues as there are simply no sellers to be found. The market has now broken out from last week's range. I am continuing to hold my small net short position. Have a good night.

Repositioning

Amgen was by far my largest holding and remains my largest holding but not by as much. As Amgen has risen and other healthcare names have floundered I have raised the weighting of other holdings over the past few days. I am short a boatload of PFE April and May 17 Puts. I am also long a good amount of Gilead Sciences.

The Window For A Decline

The market is currently in its window for a decline. The 10 day moving averages of the put/call ratios have reached an extreme. Expiration is now behind us and the market will be overbought on an intermediate term basis tomorrow. This window will stay open for about another week when the beginning of the month rolls around.

The S&P 500 is sitting where it was a week ago, even though it might feel like the market is taking off.  It is generally very difficult for the market to make large advances under the conditions I described. I am going to continue to give the benefit of the doubt to the bears given the current backdrop.

All Bulled Up

There is nothing like a buy the bad news reaction to turn the final non believers into believers. In the meantime all the market has done is revisit last week's highs.

At every high in the past year the market has spent some time testing the highs and even making marginal new highs before rolling over. I believe that is what is currently occurring. I remain of the belief that a tradable top is being put in. Have a good night.

Be Careful What You Wish For

I think the coming correction will be contained unless we see heavy stock issuance. The mother of all offerings would be the government selling their Citigroup stake. If I were a bull I would be praying for the stock to go down so that the government does not want to sell. The further above $4 the stock goes, the more likely the government will be to sell.

While I could see the market rejoicing when the offering is announced I don't believe there will be much rejoicing once the shares are issued and the market is choking on it.

Destined To Fail

I was expecting the bulls to protect 1150 but was not expecting this type of strength. I believe this rally will fail and that 1150 will be tested again this week. I am debating whether to raise my short positions. I continue to have a small net short position.

Sold Gilead Calls

I sold calls against my long Gilead position.The stock is quickly approaching its 52 week high which might give it some trouble.

Scrambling

It seems to me that many have been caught relatively off guard by the passage of health care reform. Many are scrambling to figure out the effects of the bill. While a bounce is not out of the question, uncertainty and a stretched market are not generally a formula for major upside.

The Market Finds Its Excuse To Correct

The market had become very stretched when looking at various sentiment and overbought measures. Health care reform seems to be the excuse the market needs to correct.

We are quickly approaching the 1150 level of support on the S&P 500. That level should be a tough nut to crack for the bears. However, even if the bulls are able to defend it this morning, a correction usually lasts more than a session and a half and there should be further attempts later in the week.

Health care reform reinforces my longer term bearish concerns. Starting in the second half of the year stimulus will be down year over year, comps will get tougher and we will be looking at higher taxes in 2011.

Clarity Soon

Once the expiration influences are out of the way next week we should get a better sense of where this market wants to go. 1150 was very tough resistance on the way up and should provide support the first time it is tested. Have a great weekend.

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Beats Me

Expiration days are the hardest for me to game. I rarely do any directional trading on expiration although I will look at individual stocks that I believe are out of kilter because of expiration from time to time.

Giddy Up

Despite the lower market my two largest longs Amgen and Gilead are continuing higher. I believe that a rotation back in to defensive names will continue to benefit them regardless of market direction. The flight to crap is over.

Rydex Traders Comply

Yesterday, I complained that the Rydex traders were not yet bullish and lo and behold they became bullish. Rydex traders still have minimal short positions on and have now upped their longs. Rydex traders have become extremely bullish.

While not every case of extreme bullish sentiment at Rydex has led to a top, Rydex traders were extremely bullish at every top. Another indicator has fallen into place for a correction and the bulls job will be that much tougher. While options expiration has been extremely bullish for the market, I expect that a correction will begin by next week.

Heading Out Early

I am heading out early. Expiration is now firmly in control of the market and it should stay that way until Monday afternoon. The VIX is at 16.44 so I don't plan on selling any volatility this expiration. Have a good night.

Market Rotation

There has been an endless rotation into economically sensitive stocks. Today, my largest longs Gilead and Amgen are finally starting to move. I am guessing that the rotation is over, regardless of market direction. Defensive stocks should start to outperform.

A Look At Rydex

I continue to be of the opinion that we should see a correction start by next week at the latest and that the correction should reach 1150 on the S&P 500 at a minimum. I don't see a correction being as strong as the one we saw in January. May seems like a better time for a big move down as seasonality becomes a headwind, the stimulus starts wearing off and comparisons become a lot tougher. The caveat is that if the government sells its Citigroup stake I think the current correction could be very large.

The reason I don't believe we will see a correction as large as January's is many indicators are not as stretched as they were in January and this part of the year is seasonally strong. People are shoveling their tax refunds into the stock market, which is why seasonality is in the market's favor right now.

Another indicator that is not as stretched as it was in January is Rydex. Short positions are pretty much as low as they were in January, but long positions are a lot lower. This jibes with what I am seeing anecdotally. The bears are demoralized but the bulls are not thumping their chests the way they were in January.

Heading Into Expiration

The good news for the bears and myself is that the market seemed to have run out of steam midday. I like it when the market turns on no news as it is a sign of exhaustion. The bad news is that there was not much follow through selling once the market turned lower. Option expiration will likely be in control of the market for the next few days. Have a good night.

The Differences Between Now and January

In an earlier post I showed how the put/call ratios are looking a lot like they did at the January top. In this post I wanted to go over the differences between now and January.
  • The 30 day moving averages of the put/call ratios are still not showing the excessive enthusiasm they did in January. This is more of an intermediate term indicator.
  • The 30 day moving average of the advance decline line won't be overbought until the middle of next week. It was overbought at the January top.
  • The spread between the bulls and bears in the Investors Intelligence survey is at 25%. In January it was at 35%.
  • Corrections tend to start at the end of January when the market has been rallying for a while. We are in the heart of tax refund season and a seasonally strong part of the year.
I took all these factors into consideration before shorting and still plan on building shorts further. I believe it is always important to consider all the facts. Not just the ones agreeing with one's positions.

Added To Shorts

I have added to my short positions even though the S&P is only up 2 points since my initial short. I would categorize my net short position as small now.

The Clues

Below are graphs of the ISE and CBOE equity only 10 day moving averages. As you can see both are in areas that have previously led to selloffs.



The put/call ratios are lining up for a top with two caveats. The first is that they still can go higher through the end of the week as I explained in a post yesterday. The second is that the overall CBOE put/call ratio is not in extreme territory. This is strange as I have found that the overall CBOE put/call reading and the equity only generally line up. As you can see in the chart below the last 2 times we saw extreme readings on the equity only the overall reading was also extreme.

Threw A Log On the Fire

I used this morning's pre-market strength to move to a slightly net short position. I plan on adding on a 5 point scale up.

It Was This Close

Both the ISE and CBOE Equity only 10 day moving averages are in the area they were in at the January top. In January the market chopped around for a few days and proceeded to go down right after options expiration. Sound familiar?

I literally had my finger on a sell short order at 3:59 and did not press down. I don't plan on putting on a big position until expiration but I think the current juncture probably warrants some sort of short position. I will be looking to short any further rallies. Have a good night.

A Look At The ISE Equity Only

Below is a graph of the ISE Equity Only 10 day moving average.


The high in January was 207. If the ISE equity closes at 240, where it stands as of when I am writing this post, the 10 day moving average will be 202 and another indicator will be in top territory. Below is a look at the raw data that makes up this indicator.

Taking a closer look at the raw data, we will be dropping a very low number today, which I highlighted in red. For the three days following we will be dropping medium readings, which I highlighted in orange, so its not impossible that the indicator will continue to rise through the end of the week.

To summarize, if we get continued call buying through the end of the day another indicator will be in the danger zone. However, it is possible for this indicator to continue higher through the end of the week which jibes with a top at options expiration.

The Buy Signal

Goldman Sachs has downgraded Boston Scientific to Sell and added to its conviction sell list. Goldman Sachs equity ratings have a complete disregard for valuation. Tell me which way a stock has been moving and I could tell you what the Goldman Sachs rating is. 

Some of my best ideas have come off the Goldman Sachs sell list. American Express at $10 and Gap Stores at $19. Keep up the good work. I will be looking to purchase Boston Scientific if it gets closer to $6.

Citigroup Unlocked

The government is allowed to sell its stake in Citigroup as of today. $30 billion worth of new supply would not be a positive for the market and would likely hasten a correction. If they decide to go ahead with the offering this week a move in the market could be exacerbated by options expiration. While it is likely the government will divest its stake as long as Citigroup stays at these level, the government is notoriously slow moving so trying to figure out the timing of an offering is tricky.

Putting Citigroup aside, the market is starting to look a little tired. New 52 week highs contracted significantly yesterday and the Russell 2000 lagged. The biggest problem with a correction is that too many market participants seem to be looking for one. Maybe yesterday's comeback will finally make the last holdouts come to the bull side and clear the way for a correction. 

Bad News Bears

Today's action was not what the bears wanted to see. The second the market turned lower the put buyers came in. At a good top the first dip is usually met with call buying as everybody believes it is a buying opportunity. It seems this market might have to do some more work on the upside before the bears have their turn. Have a good night.

The Expiration Drift

Options expiration week has the tendency to extend strong trends. I can't remember the last time I saw a strong trending market reverse direction on expiration week. Most turns tend to happen in the days following expiration. While I am not trading on this I am keeping this factoid in the back of my mind.

Boston Scientific Looking Interesting

Boston Scientific's shares are down nearly 16% on news that they are halting defibrillator sales due to an FDA issue. The issue seems to be a paperwork issue rather than a safety issue, as they made manufacturing changes without informing the FDA. This issue is likely to cause a permanent market share loss even once the issues are resolved.

Defibrillator sales make up approximately 20% of Boston Scientific's profit. If Boston Scientific goes down a few percent more, a complete wipeout of defibrillator profits will already be priced in. The shares were previously cheap and seem to be even more discounted currently. Astute investors such as David Einhorn and John Paulson have large positions in the shares. I will likely start building a position on fiurther weakness.

Waiting

The bulls are actually better off with a correction beginning now before things get too extreme.  A few days on the downside would allow the market to work off its overbought reading and for sentiment to become more neutral. After a correction an attack on resistance would have  a much better chance of succeeding. For my part, I remain fully hedged.

The Bear Case

Last week I wrote a lot about sentiment and how it would take a few more days of giddiness early this week to get the sentiment indicators to where they were at previous tops. That still remains the case but there are other indicators that would support immediate downside.

A week ago, on Monday the 8th, the NYSE saw 470 new 52 week highs. By Friday, with the S&P 500 11 points higher there were only 436 new 52 week highs. That is a divergence that shows that some stock are starting to sputter. In addition, the market is very overbought. I use a 10 day moving average of NYSE Advancers - Decliners and below is the raw data that goes into the calculation. We will be dropping a string of 10 positive numbers starting with two very large numbers today and tomorrow.
While it would make for a much easier short trade if we saw a couple more days of giddiness and everything lined up, there is certainly a case to be made for an immediate decline.

Equity Only

I have been complaining about the 10 day moving averages of the put/call ratios and saying they were not likely to reach the type of extreme they saw in January or other major highs until next week. A reader on the message board, CP, posted a chart of the 5 day moving average of the CBOE Equity only that looked pretty extreme.

I don't usually pay much attention to the equity only reading at the CBOE because it usually is inline with the overall reading, which I follow, and is not yet close to an extreme. Upon seeing the chart CP posted I decided to take a look. Below are the 10 Day moving averages of the CBOE and ISE equity only.

The CBOE Equity only is certainly closer to an extreme than the overall CBOE (which I posted 2 days ago) or the ISE Equity Only.

I believe the market is closer to extreme optimism than extreme pessimism.  I also realize that every top looks different and we might not necessarily see the same extremes this time around.

To make things crystal clear I am not bullish and am actually slightly short because I got rid of  Vodafone but did not dispose of the related hedge. I want to see the whites of their eyes before I get short and as a result run the risk of missing the top. However, that same cautiousness has stopped me from getting run over this entire run. Have a great weekend.

Out Of Vodafone

I am out of my Vodafone trade. I sold the 22.50 covered calls against the position and there was only 4 cents of potential profit left in the trade so I decided to exit. I will look to buy again on weakness.

A Step Slow

The hints this morning that the market was going to fail were there. Namely Citigroup quickly traded down and the Russell 2000 severely lagged. I waited to see the opening readings of the put/call ratios and when they showed a lot of call buying I entered an order to sell short but was a step too slow and the order was not filled.

I don't want to chase weakness but if the market does rally back and we see exuberance again I might take another swipe.

Exhaustion

It appears exhaustion is settling in. I will be looking to short the next bounce if we get one.

Timing My Short Sale

Options expiration has tended to delay corrections. Most recently, the 9% January correction started right after option expiration and we had a 2% correction right after February expiration.  If somehow the market continues to plod higher through expiration it would be a no brainer to get short at that point.

Unfortunately, I don't believe the market will make it that easy and I expect some sort of whack between now and expiration. Here are the potential catalysts I see that could lead to a correction:
  • The regional banks flood the market early next week with stock offerings in order to repay TARP. At a minimum, that should put a lid on the market and make it safe to short.
  • The Big Kahuna. This coming Tuesday, March 16, is the date that the government is allowed to sell its Citigroup stake. At current prices an offering would be over $30 billion. In some cases option expiration could exacerbate a move. It could get really ugly if the government comes to market next week. I wouldn't count on this one happening next week as the government moves mind numbingly slow. It should happen at some point if Citigroup's stock price stays at current levels.
  • The 10 day moving averages of the put/call ratios should be at extreme levels early next week.
  • The final option is plain exhaustion or a blow off. These are tricky and require a bit of intuition. In a blowoff I look for panicky buying as opposed to a steady advance. This should be accompanied by heavy call buying. We have not seen a blow off top in a long time. More often we have seen exhaustion where heavy call buying fails to lead to much upside.
Most likely I will start slowly scaling into a short position this morning. If I see one of the above catalysts I will pick up the pace of sales. 

The Air Is Getting Thin

The air is getting thin as the S&P 500 continues its 100+ point climb without taking a break. This morning, the S&P 500 is breaking out past the January highs. Even if the market has really broken out, I believe that it is an extremely high probability bet that the market will come back and test this breakout level.

The reason I believe the 1150 mark on the S&P 500 will be retested at minimum is twofold. Most of the time breakout levels are tested after the initial run, especially when the breakout happens after a parabolic run. The second reason is that the silly part of a run is usually erased in the ensuing correction and we are firmly in silly territory.

The only question is that of timing and I will look at how I am considering timing a short trade in another post shortly.

The Reason

The reason I pulled the plug on my short position was:
  1. I realized that when the retail crowd gets involved all the extremes are generally reached. The 10 day moving averages of the put/call ratios are not yet showing extreme bullish sentiment.
  2. With Citigroup having such a strong day that will probably mean that more retail money will come in overnight.
  3. The loss was still small.
 Have a good night.

Taking A Loss

I have taken a small loss on my short position. I am going to wait until I see the whites of their eyes. I am market neutral.

At Joes Barber Shop

I needed some time away from my screen this afternoon to try and make sense of recent market action. I decided to take a walk to Joe's Barbershop to get a haircut. As luck would have it a retail stock broker was getting a haircut next to me.

I played coy and asked him what was going on with the market. He said that business was great and that the speculators are back. He likes Citigroup because Barclay's said they are looking for a US takeover and Citigroup is the cheapest US bank. He likes Ford because its going to be the next Toyota and he likes Jet Blue because the price is so low. I politely thanked him and wished him luck.

I have come to the conclusion that the retail investor has been giving this market the extra energy that seems to make the market keep going and going. The move in Citigroup has really awakened Joe Sixpack's animal spirits. It could not have happened at a better time, tax refund season. This certainly explains why all the action has been in the most highly speculative, heavily shorted stocks.

Joe Sixpack is not the best market timer but this is not necessarily bearish yet. What would tip me off that Joe Sixpack is about to get run over? The government could sell their Citigroup stake starting on March 16. If they choose to "Katie bar the doors".

What Are They Waiting For

The large regional banks like Regions Financial and Suntrust have been on fire, hitting new 52 weeks highs. For the most part the large regional banks have not yet repaid the TARP. After PNC raised capital a few weeks ago I expected a flood of large regional offerings but there has been nothing as of yet.

If there ever was a time to raise capital this is it and it is difficult for me to understand what these banks are waiting for. I have heard explanations that the regional banks are in such bad shape that they are afraid or can't exit TARP.

I expect that next week we might see a few offerings. The reason I am focused on this is because I watch supply and demand of stocks. A heavy supply of new issuance would be a negative for the overall market and the regional banks and financials in particular.

Still Expecting A Pullback

Yesterday we saw a continuation of the heavy call buying. This morning we are seeing the American Association of Individual Investor survey come in at 45% bulls and 25% bears. That matches the largest spread between bears and bulls this year, which was seen in early January right before the nearly 10% correction.

The positives are that the 10 day moving averages of the put/call ratios will take a few more days to reach a bullish extreme and that we are approaching option expiration. Corrections have tended to be delayed until after option expiration.

Do We Need A Breakout

We are less than five points away from the January high on the S&P 500, which was 1150. If we were to breakout from that level it would likely suck in the last holdouts. With the market and sentiment stretched that would likely lead to a climax rather than another leg higher. Have a good night.

What If

This morning I showed the 10 day moving averages of the put/call ratios. We are still not near the extremes seen in January. What would it take to get the 10 day moving average of the put/call ratio to the point it was at in mid January? If the call buying continues through early next week we should be there. That said two extreme days back to back like today and yesterday usually lead to a pullback in relative short order.

Nothing Like The Citi

There is nothing like a nice move in Citigroup to get the animal spirits roaring. The stock still has the ability to capture investor's imaginations like no other. The call buying is at similar levels to yesterday. The market is becoming more dangerous.

I am tempted to add to my bearish bets but I am holding off. It will take some time to reach the extremes of early January, as I outlined in my opening piece. I want to make sure I don't run out of ammo in case we get there. My net short position remains small and we are trading right around the levels where I initiated my position yesterday.

What The ?

Citigroup is now up 10% from its Monday close on news that the government might sell its stake. At current prices the government's stake is worth about $30 billion. In Decmeber, Citigroup's stock sank over 20% when Citigroup raised $20 billion in equity to pay back TARP. This offering would be even larger.

Why so many people would be so eager to step in front of the largest offering of stock ever is beyond me? The government's shares are locked up until the end of March, so the insanity could continue until then. After that the bulls might just get what they are hoping for, but it won't be pretty.

Another Cash Deal In Healthcare

Facet Biotech agreed to be taken over in an all cash deal by Abbot Labs. The bulk of cash deals are taking place in the healthcare sector, while investors are chasing economically sensitive stocks to play a recovery.

Healthcare companies are also actively buying back stock. Earlier this week we learned that Gilead is actively buying back stock. Yesterday, Amgen did a bond offering even though there are no maturities coming due. That leads me to believe they are buying back stock as well. I believe healthcare is set to pop to the upside.

If we do get a pullback over the next week I will be looking to gain exposure to Amgen, Gilead and possibly the IBB (which is the biotech ETF)

Looking For A Pullback

The equity put/call ratios on both the ISE and CBOE were more extreme yesterday than anything we saw in January. However, we are still unlikely to see the type of decline we saw in January because longer term measures are not yet stretched.

Looking at a 10 day moving average of the CBOE and ISE Equity ONLY we are nowhere near the extremes seen in January, as the charts below show. I marked the January extremes with an X. That is because we only started seeing bullishness after the Jobs report this past Friday, whereas in January we had a long period of bullishness.


Sentiment surveys are not yet registering the type of extreme readings we saw in January. Investors Intelligence bulls chimed in today at about 45%, while we saw readings above 50% in January. Seasonality is positive now as well.

I expect that the the extreme put/call readings and the overbought reading will lead to a pullback but still believe the market will need to rally again afterward before we could see a better top.

The More Things Change

After the market has rallied 100 S&P points in four weeks and we are maximum overbought they are piling into calls. The more things change ....
Have a good night.

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Dipped Another Toe

I have dipped another toe in on the short side. My net short position is now small versus slight on my last post.

The CBOE Has Joined The Party

The CBOE equity put call ratio has joined the party and is chiming in at .46. Most readings under .5 usually lead to a nice whack within a few days.

Dipping A Toe

I bought the March 115 SPY puts and sold the 112 puts. The position costs me a little over $1 and I could make a maximum profit of $2. It is a small position. I am slightly net short.

Contemplating A Move To The Dark Side

I was not planning on moving to a net short position simply because I don't believe we are set up for a very large correction. However, I am being tempted and I am not sure I can resist.

The Fallacy Of Year Over Year

There is an endless drumbeat in the media about the one year anniversary of the market low. This is also the one year anniversary of the low in the economy. Year over year numbers are going to start looking a lot better. This is largely a statistical anomaly and in reality has little significance. The measuring stick has simply been shortened. If I measure myself in kilograms instead of pounds that doesn't mean my diet has been successful.

Charles Biderman of Trim Tabs has been highly critical of the government and economy because he was tracking tax withholding receipts and thought the government was underestimating the job losses. He has now turned bullish on the economy because year over year withholdings in January were flat. His measuring stick has simply become shorter.

Over the coming months we will see economic figures that appear robust while people on Main Street will be scratching their heads. By the second half of the year stimulus will be a net negative and comps will get a lot tougher. I believe this market will make an enduring top this Spring as investors will be dazzled with great year over year comparisons. That will set the trap.

The First Dip

The first dip lower is usually bought and today's gap down opening was no exception. We will be maximum overbought at the end of the day and the ISE equity reading is over 300. I can't remember the last time I saw that. Cuidado.

Silly Analyst

Sell side analysts and investors often frame any incoming data in a way that fits with their positioning rather than looking at the data objectively. The Morgan Stanley analyst who covers Gilead Sciences has a hold on shares of Gilead Sciences but is the largest bearish voice on Wall Street regarding the company. He put out a note yesterday that highlights his biases.

The Morgan Stanley analyst says that he met with Gilead management and they told him their near term focus is buying back shares. As a Gilead shareholder that is music to my ears. There is nothing I like to hear more than when a company with a cheap stock price, low leverage and lots of cash buys back shares. It increases the value of the stock and puts a floor under the shares while they are in the market.

The Morgan Stanley analyst managed to frame a buyback as a negative. He points out that the value of employee stock options outstanding is $1.35 billion so a large repurchase will largely only offset that dilution. That sounds logical except that he and other analysts project earnings on a diluted basis, which already counts those shares. He also points out that approximately half of Gilead's earnings is overseas and unless they choose to repatriate cash, only half their earnings is available for share repurchase. That is true for nearly every large cap company.

The danger with being smart is that you can find a way to justify any position. Harvard professors were able to come out with justifications for the Internet bubble that laymen simply could not have thought of. In the stock market it pays to stick to common sense. A share buyback from a reasonably priced, strong cash flow producing, unleveraged company is a good thing. Period.

Bad News and Good News

The market will be maximum overbought at the end of the day today. That means that even if the bulls manage to rally the market back in the face of this gap down opening they will be faced with a maximum overbought market at the end of the day today. At best the bulls are looking at a choppy to sideways market for the next few days until the overbought condition is worked off.

The good news is that options expiration is approaching next week, which has tended to cap the downside during strong up trends. In addition, I outlined yesterday why I believe this correction will be relatively mild.

Is Today A Holiday

The market is stretched and sentiment is starting to seem too rosy. Both the ISE and CBOE equity readings were showing a lot of action in calls and it seems like all the bears went into hibernation.  In my opinion the chances of the market getting a whack this week are high. The first dip is usually bought by those who missed the rally so I'm not sure how much of a correction we will get. We'll cross that bridge when we get there.

It felt like holiday trading today. There were a few times I thought my internet connection was down as my quote screen was barely moving. Have a good night.

Bad Posture

Verizon's CFO just finished speaking at an investor conference. He was asked about a dividend out of Verizon Wireless, which is of particular interest to Vodafone holders like myself. Vodafone owns 45% of Verizon Wireless. He says that Verizon could pay a dividend without taking a dividend from Verizon Wireless until 2012. It seemed to me he was getting irritated as the analyst tried to dig deeper.

The only reason that I could think of that the CFO was getting irritated is because he is posturing. Verizon wants to choke off dividends to Vodafone so that they have more leverage in trying to buy Vodafone's share of the business. That is a good thing in my book, as a deal would make Vodafone's stock soar. The posturing seems silly to me as Vodafone is not hard up for cash and could easily pay their dividend.

Market Leaders

The stocks that are going up the most are regional banks that have not yet exited the TARP like Suntrust and specialty retailers like Abercrombie and Zumiez. Never mind that many of these regional banks can't even exit TARP because their assets are so bad. Never mind that specialty retailers like Abercrombie & Fitch and Zumiez trade at nearly 30 and 40 times forward earnings respectively. The only pertinent information is that these stocks have high short interest.

There's Something Happening Here

Anecdotally, it feels like there has been a change in sentiment over the weekend. There is nothing concrete I can point to other than the ISE all equity ratio. The bears are awfully quiet and it feels like they have given up. For the past few weeks I have harped on how sentiment was not lining up for a correction. While we are not at the extremes of January I believe sentiment is now on the bears side. The bulls still have momentum.

Gilead Sciences and Amgen

Two years ago I owned Amgen when they were being relentlessly hammered, due to issues with their anemia drugs. Back then Amgen's stock price was in the 40's, while Gilead Science's stock price was in the 50's. Nearly everyone I told about the position told me that Gilead Sciences was growing much quicker and was the better investment. Sell side analysts agreed.

Gilead did indeed grow much quicker but the valuations changed as Gilead used to trade for more than twenty times earnings, while Amgen traded at less than ten times. Here we are two years later and Amgen's stock price has outperformed Gilead's  by over 40%.

Today, sell side analysts seem more enamored by Amgen and the valuations are not that far apart anymore. I am still more comfortable with Amgen because the valuation is better and I am more familiar with the company and how the stock trades. However, the valuations are close enough that I am starting to buy Gilead and reduce Amgen for the sake of diversification.

Joining The Small Cap Discussion

A lot of noise has been made recently about the Russell 2000 outperforming the large cap indices. The following thoughts come to mind:
  • The Russell 2000 has been outperforming since December and it has been rarely mentioned until recently. Once everybody starts noticing something it usually means it is late in the game. In the near term I expect that the period of outperformance is nearing its end.
  • In December, the large cap space saw $50 billion worth of secondary offerings between Wells Fargo, Bank of America and Citigroup. I believe the digestion of that supply has been a major cause of the underperformance.
  • Hedge funds, which traffic heavily in small caps, took down risk at the end of the year to lock in performance. I suspect that they have been re-risking recently.

More Thoughts On A Correction

  • Next Friday is options expiration and expiration has tended to delay corrections. It would not be that surprising to see a correction delayed until after expiration. 
  • Momentum has tended to carry over to Monday's only to see a turnaround on Tuesday. Even though the market will not be maximum overbought until the end of the day tomorrow I would not be surprised to see a move lower tomorrow.
  • In an unbalanced global economy negative surprises can occur at any time. Overbought markets and negative surprises do not mix well. Most likely nothing will happen but it is something to consider.

The Pause That Refreshes

In mid January almost every indicator I looked at was at an extreme on both a short and intermediate term basis. There was heavy call buying for multiple weeks in a row. Sentiment surveys were showing record low bears for an equally long period of time. The market was maximum overbought on both a 10 and 30 day basis. Those factors made me confident we would see a 5% to 10% correction.

The good news for the bears is that we are finally starting to see some exuberance. In addition, the market will be maximum overbought on a 10 day basis at the end of the day tomorrow if this rally continues.

The bad news for the bears is that we are only now starting to see some exuberance and the market will not be overbought on an intermediate term basis for a couple more weeks. While Rydex traders were positioned leveraged long in mid January, they are currently positioned conservatively.

I do believe that the maximum overbought reading and the very recent exuberance should lead to some sort of a correction this week. I just don't believe it will be of the magnitude of the move we saw in mid January. We will likely need to re-rally for a better top to emerge.

Back In The Pool

The VIX is plummeting and investors are sounding the all clear. I think the market will get a whack sometime next week. For those still bullish, the VIX is at 17, so a stock replacement strategy probably makes sense. Have a great weekend.

Thank you to all the readers who have been linking to Amazon from my site, when making a purchase. Remember, if you shop at Amazon you could support the blog at no cost to yourself. There is an Amazon banner all the way at the bottom of the page or a number of links on the side. If you go to Amazon through any of those links when you make a purchase, the blog will receive a small percentage. The item will not cost you a penny more.

An Extreme Sentiment Measure

Most sentiment measures I follow have not registered extreme readings. However, the Hulbert Stock Newsletter Sentiment Index is registering an extreme reading. I don't track this indicator but it is something to consider. From Marketwatch:
Based on the several hundred investment advisers I track, I'd have to say that bullish sentiment is approaching dangerously high levels. Consider the Hulbert Stock Newsletter Sentiment Index (HSNSI), which represents the average recommended stock market exposure among a subset of short term stock market timers tracked by the Hulbert Financial Digest. 


It currently stands at 62.8%, up from 13.8% just one month ago. That's an awfully big jump for so short a period of time, especially considering that the Dow Jones Industrial Average rose a modest 4.4% over this period.
Also worrying is that, with but one exception, the HSNSI is now at its highest level since early 2007, more than three years ago.


That one exception, when the HSNSI was higher than it is now, came in early January, two months ago. Soon thereafter, of course, the market entered into its January-February correction, during which the Dow declined by nearly 8%.

I Don't See It

I don't see us topping out today. I think we are definitely at the point where the Johnny Come Latelys are entering the market. However, because there has been so little excitement during this entire rally I think it could take until the middle of next week until we see a top.

Fully Hedged

I am now fully hedged but not yet net short.

We Might Have Found The Next Problem

The following ad popped up on my screen today.
In my experience it is usually a bad sign when borrowers start targeting retail investors directly.

And The Chase Is On

A few days ago I said I wanted to see a successful Greek bond offering and the jobs report out of the way. Yesterday, the Greeks successfully offered bonds and in an hour the jobs report will be out of the way. Once those worries are out of the way people will be free to follow their primal instinct and chase the herd (after the market is already up 7% in three weeks).

I expect this move higher to finally lead to a correction. Normally after an extended run like this one I would expect a jobs report to lead to a pop and drop. What makes this run different is that investors never really embraced the market so I would not be surprised if this final move higher lasted a few days.

Get On With It

I cannot wait for the jobs report to be out of the way so I don't have to hear about it anymore. Could something more meaningless be so hyped up? My best guess is that the jobs report will lead to a final spurt higher before we finally see a correction. Have a good night.

Adding To The Confusion

To add to the confusion the CBOE is showing heavy call activity this morning while the ISE is showing heavy put buying. I prefer the CBOE, but its much better when they are singing the same tune. Given the fact that the market is overbought I would err on the side of caution here.

Easy Comps

Retail sales were better than expected this morning. Last February was the heart of the economic crisis and comps are very easy. March was the bottom in the stock market and in the economy. Starting in April comps will get increasingly tougher and by the second half government stimulus will have a negative effect.

Get Out Of Jail Free

It seems the bulls have a get out of jail free card with today's claims numbers and tomorrow's NFP data. If the number is bad the bulls will point to the weather. If the number is good they will say things are getting better. I suspect today's claims data will be better than expected as last week was likely effected by the weather.

Play It Again Sam

I hate to sound like a broken record but I continue to believe that the direction of the market is a tough call at the current juncture. Its hard to see a sustained move higher or lower as so many readings are mixed.

The market seems to be roaming around aimlessly. I have somewhat reduced my long exposure into strength this week and added a hedge but I don't want to go short until I see some exuberance. 

In Neutral

The market is quite overbought and that proved to be too much for the bulls today. At the same time sentiment is somewhat neutral but heading towards the bullish camp. These mixed readings leave me with very little edge predicting the near term direction. I would love to see a move to extreme bullishness but the market has not been going to extremes in the past few weeks. Have a good night.

What Ails Pfizer: Part Two

Click here for part one

Pfizer pays 72 cents a year in dividends, which leaves them with nearly $1.50 a share (or $12 billion) for other uses. Currently, they are paying down debt from their Wyeth acquisition but soon that cash will become available for other uses. I believe that they will use a large portion of that cash to buy back stock and at that point the shares will have no choice but to rise.

The biggest qualm I have with the stock is that it is a top hedge fund holding and almost every article I read about the stock is positive. The contrarian in me cringes when I see that. I sold out of the stock in early January for that reason. But a nearly 15% decline since the mid January highs makes me believe that the stock is becoming less loved. If Pfizer does a large buyback, like I believe they eventually will, then sentiment will not matter.

Pfizer is getting hit today because a drug in their pipeline had bad results. While this is genuinely bad news Pfizer's stock price is not placing any value on Pfizer's pipeline anyway. There are many more drugs in the pipeline and their will be more failures and some successes.

I would be willing to get more aggressive once Pfizer starts buying back shares but at these prices I am very comfortable holding a position.

What Ails Pfizer

If there is one stock I had to hold for the next two years it would be Pfizer. I am currently short the March 18 Puts and the April 17's, so it is likely that I will soon be a shareholder. The company is supposed to earn $2.20 a share this year putting them at 8 times earnings.

The $2.20 a share in estimated earnings for Pfizer actually understates their earnings power because their tax rate is unnaturally high. They are repatriating money from their overseas divisions in order to help pay for their Wyeth acquisition. Without repatriating that cash their earnings would be closer to $2.40 a share and Pfizer is closer to 7 times earnings.

Most companies do not repatriate money because the US government taxes it.  Instead they leave the money overseas and borrow domestically. Initially that makes EPS appear higher but then they are left paying interest on money they already have. Over time they end up paying a lot more money in interest than they would have paid to the US government.

Analysts have frowned on Pfizer's decision to repatriate money and have had to lower their EPS estimates as a result. But there is a major conflict of interest. It is those same investment banks that the analysts work for that would have done the bond sales if Pfizer chose not to repatriate money. If more companies chose to do what Pfizer did investment banks would lose a lot of revenue.

Click here for Part 2

The Embrace

We are finally starting to see investors embrace the rally this morning as there is call buying. This has been the missing ingredient for a top and a decent pullback. Ideally, I would like to see this go on for a few days before I start shorting.

I have sold the March 22.50 calls against my Vodafone position as it has had a nice run.

Same Story

The market remains overbought but sentiment is still pretty neutral. In order to get more than a shallow pullback I believe sentiment will need to become more bullish. I was pretty sure that a breakout yesterday would get traders bullish. However, Rydex traders barely budged yesterday.

We are up against resistance so a pullback would not be terribly surprising. I just would not expect it to go that far.

Five Things I Would Like To See

  1. Greece sells bonds and fears subside, so I don't have to hear about all Greece all the time.
  2. The Employment report passes. I don't care if its good or bad. I just want it to be in the past.
  3. Everybody breathes a sigh of relief that Greece and the employment report are in the rearview mirror and buy stocks mindlessly.
  4. I go short. OL DAWG gives his stamp of approval and joins me by buying out the entire float of EDZ.
  5. Market participants find another part of the unbalanced global economy to worry about.

Breakout

The market has broken out and I suspect this will finally get market participants bullish. It could take some time but a short side trade is finally within view. 1130 on the S&P 500 seems like a decent risk/reward entry point.

Pound Getting Pounded

While Vodafone is breaking out to a new 52 week high in London, I am not seeing any of the benefit as the British Pound has been getting beaten mercilessly. Vodafone's geographic revenue streams are not that different from a large US multinational's. They have the Verizon wireless stake, which is in US Dollars, and assets all over Europe and emerging markets. In the long run weakness in the pound should not matter all that much. However, in the short run it is clearly a headwind.

Sold Thermo Fisher

I sold Thermo Fisher for a small gain. I want to reduce my long exposure.

Getting To Excess Optimism

We are finally starting to see some emerging signs that the rally is being embraced. There was speculative action in many small cap stocks yesterday. Rydex traders finally "started" moving back to the bullish side yesterday and the CBOE equity only reading was low.

Early last week we also saw signs that investors were warming up to the market but the market took a small hit and investors quickly moved back to the bearish side. I would prefer if the market kept rallying and we reached extreme optimism. I find it much easier to trade at the extremes and the resulting moves are stronger. As an example, last week's move lower was weak because we never reached extreme optimism.

We are seeing a gap up this morning right into resistance at 1120 on the S&P 500. I previously believed that level would cap the market but am no longer so sure. We could see the bears attempt to defend that level. I would not be buying into this gap up.

Bank of America Warrant Auction

The government has announced it will be auctioning off Bank of America TARP warrants. The effect will be similar to a $2 billion issuance of stock. Bank of America is down slightly on the news and this is a small net negative for the market.

Fade The Crowd

I continue to believe that the economy is unbalanced and that the market is well above fair value. Readers know I am not one to shy away from the short side. However, if there is anything I have learned over the years is that it does not pay to be short when the consensus is negative.

Looking at Rydex data, put/call ratios, sentiment surveys and anecdotal sentiment over the past few weeks has kept me away from the short side as the evidence has pointed to a bearish consensus.

There are times when the consensus is negative and the market goes down more. But for the most part it is not a bet that pays. That is a lesson I learned the hard way and paid a lot of tuition for.

We now find ourselves at the top of the range I envisioned and yet I am hesitant to put on many shorts. I am still not seeing the excessive optimism I look for before going short other than some silliness in small cap stocks. It is hard to believe that a 70 point rally in the S&P 500 has not made the crowd optimistic but the evidence of excess optimism is scarce. While I have added a hedge today I am not ready to go short.

Shorted XRT Calls

I have shorted the April 38 XRT (the retail ETF) calls as we approach the top of the range. This is more of a hedge to my longs than an outright short. Sentiment still seems too bearish to me but I don't want to press my luck too much on the long side.

Rebought Thermo Fisher

Thermo Fisher is down on news that it lost the bidding war for Millipore. I have bought the shares. If anything the price paid for Millipore only validates Thermo Fisher's value.

Cash Money For Healthcare

Germany's, Merck KGaA is buying Millipore for $6 billion in cash. In addition, OSI Pharmaceuticals received a $3.5 billion hostile cash bid from a Japanesese firm. In the past year the vast majority of cash takeovers have occurred in healthcare. The reason is that healthcare companies have clean balance sheets, generate strong cash flow and trade at reasonable valuations.

Most investors would rather own economically sensitive stocks because those are the stocks that are supposed to do well at this point in the cycle. No matter that they trade at much higher valuations and many companies are still over leveraged and should raise capital. Healthcare stocks are not supposed to be owned at this point of the cycle.

I don't care what stocks are supposed to be owned right now. I would rather be where the cash buyers are. The vast majority of my long exposure is in healthcare.