Looking At The Sentiment Indicators

There are several sentiment indicators that are lining up for a bottom. The put/call ratios have been showing extreme pessimism as has the AAII survey. Hulbert newsletter writers are recommending short positions on the major averages. Yesterday, the NAAIM indicator moved into extreme pessimism territory as well. From the NAAIM:

Unfortunately two of my favorite indicators have been holdouts, Investors Intelligence and Rydex. Both have shown improvements since late March but are not at points that are consistent with major bottoms.

At every major bottom and top one can always find one or two indicators that are not lining up. With that said its difficult for me to write off two of my favorite indicators. The totality of the sentiment indicators lead me to believe that we are in the late innings of this correction but I would not be surprised if there is one more push lower. If we do get another push lower I believe it could be bought.

The CA CEO Said The Same Thing

A few readers have asked about Symantec's overseas cash, which the Symantec CFO used as an excuse for why the pace of share repurchases cannot be increased. I will respond to this but I first want to remind readers that last July I attended the CA Investor day and the CA CEO gave the same excuse. An activist came in and he found a way. Here is the tape:

There is a way for Symantec to return more cash:

  • Symantec has nearly $900 million in US cash and generates more than half its cash in the US.

  • Symantec could borrow for next to nothing in the US, considering that it has the cash overseas. If there is a repatriation holiday anytime in the future they could net this out.

  • This does not explain why Symantec refuses to make a commitment to shareholders to at least continue repurchasing shares at the same pace.

  • I would even argue (and I know this is an unpopular view) that it pays to repatriate the cash and pay the taxes. If an item that was worth $1 was selling for 50 cents, it would make sense to pay a 20% tax to purchase that item. A rational person would not avoid buying that item in order to save on taxes. By the same token given how undervalued Symantec is it would make sense to repatriate money to repurchase shares. This is very unlikely.

Crisis Necessary For Crisis Response

It has been an unfortunate truth that in order to get a crisis response from the EU or ECB that the crisis has had to escalate to levels that threatened the existence of the EU. The crisis is once again beginning to spiral out of control with Spanish and Italian borrowing rates blowing out. This is both good and bad. The reason that a crisis is bad is obvious. The reason it is good is that this will eventually force the hand of the powers that be in Europe to deal with the crisis. We are likely to see a strong rally when that finally happens.

On a side note I am not advocating printing money to deal with every problem. The Italians put their fiscal house in order and made real changes. They are running a primary surplus, which means that they are running a surplus if one excludes interest payments. If Italy were paying the same interest rates as Germany they would be running a surplus. Germany, the poster boy of fiscal responsibility, is not running a primary surplus. Italy is a country that is deserving of help from the EU and ECB but they are being left to drown on principle.

My Trip To Symantec Analyst Day

There are few things I hate more than public speaking. One of those things is losing money. Losses in Symantec led me to the Symantec Analyst Day in San Francisco in order to try and nudge Symantec management to return more cash to shareholders. I believe shares of Symantec are grossly undervalued and that the solution to this undervaluation is quite simple.

Symantec trades at six times free cash flow. If Symantec directs all its free cash flow to share repurchases there will either be no more shares left in 6 years or the stock will be much higher. The latter is far more likely. Its simple math. In the past decade Symantec has spent $20 billion on acquisitions. The current enterprise value of Symantec is $9.5 billion. Assuming no value for the preceding company the market believes that Symantec destroyed $10.5 billion in capital.

The environment at the analyst day was very pleasant. All the analysts and company management knew each other. There was a continental breakfast, refreshments and gift boxes. The questions by analysts were mostly softballs as analysts need to maintain their access to management. Given this environment it was doubly hard to speak publicly because my question stood out. I tried to ask my question in as polite a manner as possible but the CFO danced around my question so I had to follow up in a more direct manner.  The recording and transcript of my question and answer follow: ( I recommend reading the transcript rather than the YouTube video. The British accent makes the CFO's response sound convincing. But reading the words makes it obvious that my questions were largely ignored)

Analyst: Tsachy Mishal

Question – Tsachy Mishal: Tsachy Mishal, TAM Capital Management. At a 17% free cash flow yield, how can any acquisition stand up to that test? It's a business that you know and you can get a 17% after-tax return. Why not put even more money into the share repurchase?

Answer – James A. Beer: Yeah.

Question – Tsachy Mishal: And secondly,  while I believe a share repurchase is better (than a dividend) you can still commit to shareholders by saying we'll return $5 billion over the next three years. It doesn't necessarily have to be a dividend, but why not a commitment versus just saying we're repurchasing aggressively, which could stop tomorrow?

Answer – James A. Beer: Well, so let me address a few themes there. First of all, I do think it is important to continue to have a balance between the use of capital in terms of returning it back to shareholders and using it on acquisitions that will allow us to accelerate our strategy, get time to market faster, and that will drive additional cash flow generation streams out into time. Again, we've got good opportunities, we're right in the middle of very good markets, but they're evolving relatively quickly.

And it's important that we make the right moves in terms of M&A in a disciplined way, sensible prices, real focus on integration. And so we'll continue to have that type of perspective, and I think that will be important to driving those top line type projections that I offered, that will drive the sort of cash flow generation, that will drive the present value, that will drive stockholder value.

Now in terms of the buyback volume and so forth, last year we used an amount basically equal to the generation of our U.S., of our onshore cash flow from operations. We deployed an amount equivalent to bring down our share count net 4.3%. That's a strong record, I would argue, by any measure. And further, I would argue that while I accept your notion that it can be turned off, I think you have to look at the history.

For the last six years that I've stood on this stage, we have consistently bought back a large volume of shares every year, through some of the most difficult macroeconomic climates that the country has faced in decades. And so I think we have built a consistent record that is illustrative of the seriousness of intent that we have in terms of returning shareholder value.

Question – Tsachy Mishal: Could I follow up...?

Answer – James A. Beer: Yeah.

Question – Tsachy Mishal: In the past decade, you've spent $20 billion on acquisitions, enterprise value is $9.5 billion. It's not working. Why do you think that that's suddenly going to change?

Answer – James A. Beer: Because we have strong market opportunities in front of us. We're very focused around the value that we put into acquisitions, and we're very focused on integrating to get the value out of those acquisitions. We back that up by reporting to you on what we expect each quarter coming from an acquisition, so you can very much hold us to account if you will in terms of our integration performance.

Be Patient

I think it is a mistake to extrapolate from the past two Summers and predict that we will see the same type of decline again this Summer. Hedge funds as a group went completely "risk off" the past two Summers and by doing so ruined their years. It is difficult for me to imagine them repeating the same behavior that cost them dearly.

I believe there is something to seasonality and that it is not a coincidence that the Winter months have been stronger than the Summer months. This has been going on for decades. While I am not expecting the type of weakness we saw the past two Summers I believe we will see heavy bouts of negativity from time to time. Whereas it was necessary to pounce on any decline for the first few months of this year I believe it will be important to practice patience this Summer. There should be plenty of oversold readings and I don't plan on chasing moves.

Don't Get Too Negative

It is important to remember that valuations are currently not very demanding of stocks.  The biggest mistake investors make is that when the news is bad they ignore valuation and keep selling regardless of price. We see the opposite when the news is good. Until the EU allows a Lehman like event to happen I am working under the assumption that heavy bouts of pessimism could be bought.

The very short term outlook for stocks has not changed since last week. There has been little progress in Europe but the market remains oversold. The bulls still have  a slight advantage and we are likely to see a chop higher for a few more days.


Added To Amdocs

I added to my Amdocs position. They are trading at 8.3 times projected 2013 free cash flow and are planning to repurchase 9% of shares outstanding by then. That would put them at 7.5 times projected free cash flow. They have a truly recurring revenue model with high switching costs and long contract lengths. 80% of their business is recurring.

Bleary Eyed

I am bleary eyed from a red eye flight from San Francisco so this mornings update will be brief. The good news is that the market is still oversold and investors have not yet embraced the current rally. A continued chop higher would not surprise me and we could see something more if the ECB stops dicking around. The bad news is that the market has worked off the worst of the oversold reading so a move down is no longer out of the question. I think the bulls have  a slight edge but a few more up days and the edge will likely go back to the bears.

Chop Higher

This mornings update will be brief as I am at the Symantec Analyst Day.  I remain of the expectation that we will chop higher over the next few days. The deep oversold reading is still supporting us but given the backdrop of a slowing economy and uncertainty in Europe I don't believe the market has tremendous upside.

Taking A Trip

I am headed to San Francisco for the Symantec Analyst Day tomorrow. I will try to post. Good luck.

Happy With Vodafone

Vodafone has been facing a lot of headwinds. From a recession across Europe to increased regulation forcing Vodafone to lower MTR and roaming charges. Despite these headwinds Vodafone managed to grow revenue modestly and is projecting modest revenue growth for the coming year. This highlights the resilience of the business.

Assuming that Verizon Wireless continues to pay a dividend Vodafone has a roughly 8% dividend yield and a greater than 10% free cash flow yield. Over time I expect this business to grow nicely as smartphone penetration increases  and data usage grows. Vodafone has the stability of a utility with more growth. It trades at roughly half the valuation of US utilities.

Change Of Plans

Too many people, myself included, have been expecting a relief rally followed by a retest of the lows. The market decided to flip the script and cut the relief rally short. I don't think that we are now headed straight down. My best guess is that we see chopiness for the next few days, with an upside bias. The reason being that we are still very oversold.

The  slowdown in Europe is beginning to have an effect on corporate profits. Valuations are not very demanding right now so as long as there is not a complete collapse in profits there is no reason the market has to go lower. By the same token its unlikely that the market makes a much higher high than we saw in early April. I believe we are in a trading market where one can buy oversold and sell overbought.

Contrarian Lessons

As longtime readers know I am a contrarian, both in my stock selection and in my market view. I bought into the idea of buying when there was blood in the streets early in my career. However, it took a long time for me to make a contrarian strategy work. The biggest (but not the only) mistake I would make was to get too large in a trade. My ideas tended to work but there were times when I had to puke up positions because the losses I was sustaining were too much. Buying into nasty declines is tough because they often last longer than imaginable.

One of the largest improvements I made over the years is that I don't get shaken out of trades as often. It has been a long time since I puked up a position out of pure fear and pain. This past earnings season was bad for my core positions and I took a decent sized hit. At the same time, while I was not terribly net long my market exposure into a 9% decline made my losses worse. My reaction was to cut some lower conviction positions so that they did not turn into losses as well. Late last week I thought the market was ripe for a rally but I did not buy. I didn't want to put myself in the position where I might have to sell.

This week a lot has changed. My individual positions started performing better. I was able to use today's strength to write some covered calls. If I do find myself in a position where I believe the risk/reward is favorable I will now be able to act.

Looking At The Textbook

The textbook scenario would be for us to get a relief bounce for a few days followed by a retest of the lows. After the lows are retested the market would be likely to embark on an intermediate term advance. This has been the scenario I have been leaning towards but I have some doubts. The textbook has not been working so well recently and too many people are expecting a similar outcome.

As we rally I will look to lighten up slightly in order to give me room to buy on a retest. Part of the reason I have not been aggressive is because my individual stocks have been performing poorly. This has bagun to change as Vodafone reported excellent earnings and Wellpoint has staged a nice rebound. Now that I have some breathing room I expect to be more aggressive if and when we retest the lows.

Reasons To Be Optimistic

The bad news is that selling begets selling. Economic theory would tell you that at a lower price the demand for a product would be greater. Unfortunately human nature does not conform to economic theory. The lower stock prices go the more people turn negative and sell.  Market dynamics are such that when prices go lower certain people are forced to take a stop loss or "manage risk" or are liquidated due to excess leverage. It is difficult to know when this vicious cycle will end but it always does. There are numerous reasons to be optimistic that we are near the end of the decline.

At the end of March corporate insiders were aggressively selling shares and bankers were lining up IPOs and secondaries. This heavy supply of  new shares has been a negative for the market. Insider selling has slowed down significantly recently.  After the Facebook IPO flop the IPO and secondary market will be shut down for all practical purposes for a very long time. At the same time corporations continue to generate cash and repurchase shares. This week two significant M&A deals are scheduled to close, El Paso and Motorola Mobility. These two deals have a combined cash component of roughly $24 billion. This will be a welcomed injection of cash into the market.

The market is about as oversold as it gets, the put/call ratios are at a negative extreme and investor sentiment is sour. These are all conditions that are generally present at the end of declines. I believe that the conditions are ripe for a rebound and that purchases at current levels will be rewarded when the market finally bounces.




Lucky 13

It is extremely rare for a market to go down for 13 trading days without a real bounce as this one has done. Last year we went down for 13 days without much of a bounce, which culminated in a huge plunge after the US was downgrade by S&P.  Previously this was an extremely rare occurrence. Stuffing $18 billion worth of Facebook shares into a very weak market did not help matters. This decline continuing much longer would have very few precedents. Have a great weekend.

Bouncing Soon

The short term indicators are at an extreme and should produce a bounce very soon. Even within the framework of a momentum market that I laid out yesterday this move is very extreme. The level of oversold and the put/call ratios are approaching the extremes seen the last two Summers, which ultimately led to strong bounces. I expect the current situation to resolve in the same manner.

There are some intermediate term indicators that are still not in place. This might mean we will have to come down again to get a better low after a rally. Rydex traders are too long, the Investors Intelligence survey is not at an extreme and I'm just not seeing the type of negativity one would expect after such a large drop.

Darn Hedge Funds

In the past couple of years the market has been exhibiting huge moves both up and down without any corrective moves in between. Last year the S&P 500 fell 250 points in a three week period pretty much in a straight line. From late November through March the S&P 500 climbed relentlessly without a correction. Most recently the S&P 500 has fallen over 90 points in a little over 2 weeks. These types of moves used to be extremely rare but now happen on a regular basis. Hedge funds are to blame.

Years ago mutual funds dominated the investment landscape. While they are still larger than hedge funds they don't make large changes to their equity allocations. If mutual funds as a group move their equity allocation by 1% that is considered a huge move. Hedge funds can move from risk on to risk off in a matter of weeks and they tend to herd. Last Summer they went risk off in tandem and early this year they went risk on in tandem. Hedge funds are the marginal buyer and seller.

Regardless of the reason this is the new reality we are in. This means ensuring one can withstand the persistent moves in either direction. While I feel that this move lower is on borrowed time I am doing little because my portfolio is taking a hit due to individual positions performing poorly. I want to ensure that if we do see something worse I can make it through it.


Updated Charts

We are now maximum oversold as we will be dropping large negative numbers from the 10 day moving average of the NYSE Advance-Decline Line.

The CBOE 10 day moving average is now comfortably in territory only seen the past two Summers as well.


Hopefully this will be enough to stop the pain. Have a good night.

The Facebook IPO and The Oversold Condition

The market is extremely oversold as the chart below shows. The last time the market was more oversold was in August when S&P downgraded the US credit rating. We will be dropping negative readings for 8 out of the next 10 days and 5 out of the next 6. We are dropping a small negative reading today so its possible for us to get a little more oversold but this is extreme.

Facebook has raised its IPO size and its now possible it will be over $18 billion. That is a huge cash drain on the market and it is possible that this has been contributing to the weakness.



The Oversold Rally Is Nearing

The chart below is the 10 day moving average of the NYSE Advance-Decline line, which is showing an oversold market. It is possible for this line to go lower today and tomorrow but after that it becomes very difficult. This has to do with the numbers that are being dropped from the 10 day moving average.

The chart below is the 10 day moving average of the CBOE put/call ratio. It is showing the most put activity since early December. It will have a difficult time going much higher starting tomorrow.

Many signs are pointing to an oversold market and this should lead to a rally. Unfortunately, there are also some troubling signs such as expanding new 52 week lows and sentiment indicators that have not reached intermediate term extremes. That likely means that the rally will have  a difficult time travelling too far and that we are likely to need to retest these levels again after  a rally.

Goldman Sachs Tortures A Spreadsheet

I received quite a surprise when I opened my computer this morning. Aside from Europe collapsing again I was hit with a big downgrade on a large position of mine. Goldman Sachs downgraded Symantec from hold to conviction sell and put it on their conviction sell list with a $14 price target.

I do not fool myself into thinking that Symantec does not have issues. As a matter of fact I know they have issues and there are a couple of business lines that make me cringe. The reason I own Symantec is because at six times free cash flow I believe their issues are baked into the cake, and the cake is still cheap.

What struck me about the downgrade was that the analyst predicted that free cash flow could fall to $1 billion dollars or a decline of 35%. I assumed that free cash flow had the potential to decline. With a 16% free cash flow yield there is still a margin of safety if free cash flow declines. But I did not think free cash would fall by that magnitude.

I looked at the assumptions that the Goldman analyst put into his Symantec model. He is predicting lower than expected sales and a large decline in margins but that was not enough to get free cash flow all the way down to $1 billion. That only reduced free cash flow to the $1.3 billion area. In order to get to $1 billion in free cash flow he had to lower his depreciation and amortization assumption and raise his capex assumption among other tweaks of his model. These new assumptions were way off what the rest of Wall Street had modeled in. It became clear to me that the Goldman analyst was torturing his spreadsheet in order to get it to a $14 price target. I suspect that he pulled these numbers from where the sun don't shine. I have had very good results in the past when stocks I owned went on the Goldman Sachs conviction sell list. I expect Symantec to be no different.

A Look At The ISE Equity Only

I have been discussing the upcoming oversold reading a lot. The put/call ratios will also be oversold early this week. The chart below is the 10 day moving average of the ISE equity-only

It is showing the largest amount of put buying we have seen years. I don't believe that sentiment is nearly as negative as this chart would make you believe but the message is clear. In a day or two if we see continued put buying the the 10 day moving average of the  CBOE put/call will also be in the area of excessive pessimism.

As an aside I wonder if weekly options are having an effect on this ratio.




Not At An Extreme

I have been highlighting how the market is close to becoming maximum oversold. That remains the case and I would expect that if we go down at the beginning of this week we will be very oversold and poised for a rally at minimum. However, an argument can be made that we are not yet at an intermediate term low.

Once or twice a year sentiment indicators typically reach an intermediate term extreme in negativity. After a rally that had stretched for six months its possible that we are headed for such an extreme. While sentiment is negative it is not at what I would characterize as at an intermediate term extreme.

The most troubling indicators for the bulls are the Investors Intelligence bears and Rydex traders. Investment Intelligence bears are at a very low reading of 20%, a reading typically seen at highs. The bulls are at 39% which is low as well. The reason both bears and bulls are low is because most investors are in the correction camp. Overall, I would characterize the Investors Intelligence numbers as neutral to slightly bullish but not at the type of extreme seen at good lows. Rydex traders have 4.5 times as much money in bullish funds as in bearish funds. There is no way to paint that as anything but bearish.

Overall the indicators are pointing to bearish investors and a market that is becoming oversold. This is a big positive change from what we saw at the end of March when investors were excessively bullish. But it is not yet enough to be confident that we are at an intermediate term low.

Bad Bulls

The market is at a pretty good oversold reading but has the potential to get a little more oversold early next week. Sentiment is very negative but not anywhere near the type of extreme we saw this Fall. If the bears give this market one more push lower early next week it will likely be buyable. Have a great weekend.

The Power Of Negativity

Today's action is the reason I like to buy when investors are so negative. Purchases in periods of high pessimism work out the vast majority of the time. I did not think we would be higher today when I went to sleep last night. At best I thought the damage would be minimal. But after a 70 point drop in the S&P 500 and with many sentiment indicators showing the highest pessimism all year there were few left to sell and probably a few leaning too short.

During scary periods in the market I get scared as well. But I have seen time and time again that the scariest periods with the highest levels of pessimism are generally the best buying opportunities. During these periods there are always good reasons to sell and be pessimistic. But it rarely pays and it is the reason I pay such close attention to sentiment indicators.

It Happens

The extreme negativity mid-week was setting the market up for a rebound before the market received a one-two punch. Two days ago Cisco warned that enterprise IT spending is slowing, which dragged heavily on tech stocks yesterday. Still stocks managed to rebound somewhat. After yesterday's close JPMorgan, supposedly the poster boy for a responsible bank, revealed massive speculative trades that have gone wrong. While the size of the losses relative to JPMorgan's earnings is small the psychological impact is large. This increases the possibility of another push lower. The good news is that we will be very oversold if we do get another push lower.

Reducing Risk

I bought SPY call spreads yesterday and have decided to sell the position for a small gain. I am looking to reduce risk as my portfolio names are doing poorly. When my portfolio is doing poorly I cut my lowest conviction positions. My goal is to be able to ride out the higher conviction positions. My trade from yesterday was lower conviction.

Cisco Bad For Technology

I have written recently that I believe technology is the most over loved and over owned sector. This has negative intermediate term implications for the sector and we have already seen the technology sector start to underperform recently. People are interpreting the negative Cisco news to mean that a slowdown in technology spending is here. When combined with the fact that many are overweight technology this does not bode well for the sector.

This news is a gift for the bears as it hit the market in its most vulnerable spot. The bears would have likely been on the run today as the negative news flow from Europe subsided. Instead they have hit the bulls in their favorite sector. In the long run its a positive that the fluff is being taken out of technology. In the short run it means the bears might be entitled to another push lower.

Bad Company

The AAII survey of individual investors is out and it is not comforting to the bears. Bearish sentiment is at its highest since October 6, 2011 while bullish sentiment is the lowest since September 22, 2011. Retail investors are bearish on a grizzly level and they are not known for their market timing skills.

The vast majority of the sentiment gauges I look at support the idea that investors are extremely negative. I don't believe investors are as negative as the AAII survey suggests as  they type of negativity we saw this Fall is seen once every few years and I don't think we are anywhere near that type of sentiment. The lone sentiment index supporting the bears is Rydex, where there are still too many bulls. We are not yet oversold but we will get their shortly if the market continues lower.

The Magic Trick

It never ceases to amaze me as I watch investors turn bearish lower and bullish higher. I'm like a kid watching the same magic trick over and over and am still mesmerized. Today's low in the S&P 500 was over 70 points lower than the high last Tuesday. Last Tuesday everyone was bullish because Ben Bernanke was willing to do more. Today everyone is bearish because Europe is a mess. Ben Bernanke is still willing to do more today and Europe was a mess a week ago. Nothing has changed but the mood of investors.

The good news is that we are now only two days away from being oversold. This mood swing towards bearishness will allow for a new mood swing towards bullishness. I used today's weakness to increase my net long position and am growing more constructive. Have a good night.

Dejavu Not Again

I woke up at 4 AM this morning unable to sleep, thinking about what might be happening in European markets. I spent six months last year with hardly a decent nights sleep because of Europe and it seems like dejavu all over again. Last year market participants prepared for another 2008 while this year it seems they are preparing for another 2011.

There are numerous difference between last year and the current year. Last year market participants were giddy at the beginning of May. This year there was excessive optimism at the end of March albeit not to the extent we saw last year. Since then market participants have turned cautious as we have corrected considerably over the past 5 weeks.

When push came to shove last year European leaders did not let the system collapse. In the European elections hawkish leaders found themselves without a job and in Germany Merkel's party is losing support. This leads me to believe it is extremely unlikely that European leaders allow the system to collapse. After de-risking at the worst time last year market participants are unlikely to de-risk to the same extent.

In the short run the market is not yet out of the woods as we are not yet oversold. The good news is that the complacency that had built up after a 6 month rally is no longer present. There was a lot of put buying yesterday and we saw some fear. By early next week we have the potential to see an oversold market and excessive pessimism.

Very Extreme Readings

We are seeing very extreme readings this morning in the put/call ratios. The total ISE is at 34, which is likely a record if it closes here. The CBOE is at 1.22 and the CBOE equity only is over 1. We definitely saw some fear this morning. The fear does not seem as extreme as the put/call ratio's are, but regardless this is a positive from a contrarian standpoint.

Writing Covered Puts

I wrote covered puts against my hedges. This is a baby step towards being more bullish. I am holding off for two reasons. We will not be oversold until Friday and my names did not do well this earnings season so I'm feeling risk averse.

A Very Cheap Asset Class

Europe is one of the most hated regions in the world by investors. Within Europe the most reviled sector is telecom. Many stocks in this sector sport double digit free cash flow and dividend yields despite their utility like nature. It has been a lonely position of mine that this sector is simply too cheap. Vodafone is a very large position for me.

Today it seems that the richest man in the world, Carlos Slim, agrees with me as he offered to buy $3.5 billion worth of Dutch telecom company KPN's stock. This would give him a toehold in the European telecom market. This follows Li Ka Shing's (the richest man of Asian decent)  reportedly unsuccessful bid for an Irish telecom company in recent days. It does not surprise me that two of the richest men in the world are buying the most reviled sector. That is why they are rich.

A Lot Of Negativity

The bad news for the bulls is that one can argue that the very short term oversold reading is being worked off by going sideways. The good news is that sentiment has turned quite negative and that if we continue to head lower we will be oversold at the end of the week.

Last week we were headed towards a good overbought reading but the market turned south before we could get there. My hope is that we can get oversold this week as it would set up a great risk/reward trade from the long side. Sentiment is negative now so I can only imagine how negative it would be if we declined for the balance of the week. The last time we had a good oversold reading combined with negative sentiment was December, when the rally that carried us through March kicked off.

I am not certain we will get a good oversold reading because sentiment seems very negative right now. The big, bad news has passed in Europe and sovereign rates are lower than before the news. But market participants are not known for their emotional balance so hopefully they push this too far.

Stock Of The Week: Life Technologies

This week for my stock of the week at Market Folly I look at Life Technologies owned by Larry Robbins at Glenview Capital
About a year ago I attended an investment conference where Larry Robbins of Glenview Capital made a compelling case for Life Technologies. It was the best investment pitch I heard that day and I left wanting to do more research on the stock. After researching the company on my own, the stock seemed interesting but I was not as excited as Larry Robbins was about it. A year later the stock is sitting more than 10% lower and I have decided to take a fresh look.

Continue reading ....

Sentiment Polls

Yesterday I pointed to the theStreet.com sentiment poll as showing too much bearishness. Today two more polls came out showing very high levels of bearishness. Below are the results from the Weekly Bespoke Market Poll which show the highest level of bearishness since they started this poll in February


Below is the TickerSense Blogger Sentiment Poll from Birinyi Associates:


Bounce Odds

Today is going to be the fourth down day in a row and at one point last night the S&P 500 stood 5% lower than its high last Tuesday. In the very short run the market is oversold and we saw some panic last night. While it would be better if we saw panic during the regular session, these are all ingredients for a bounce.

While the market is setting up for a bounce there is less reason to expect a lasting low. We are not yet at a good oversold reading as this decline is only four days old(in the last paragraph I said we were " very short term oversold", not to be confused with a good oversold reading) . After a seven month rally it would not be surprising to see a correction that gets us to extreme oversold conditions and extreme bearishness. We are not yet there. I am not saying this will happen, only that its  a possibility one must consider.

The timing of the government's $5 billion AIG offering, which priced last night, could not have been worse. The last thing the market needed was more supply. This additional supply will on the margin make it more difficult for the market to bounce.


Expecting A Bounce

Most weekends I check the reader poll on theStreet.com website. At the extremes it has been a pretty good contrary indicator. This weekend it is at an extreme as readers are very bearish. This strengthens my belief that we are due for a short term bounce. I expect a bounce by Tuesday.

Where Did That Come From

We have had three down days in a  row and we are 45 S&P 500 points lower than where we were on Tuesday. While we were nearing an overbought reading, the magnitude of the downside has been a surprise to me. Especially since there does not seem to be much in the way of news.

We are nowhere near a good oversold reading as we have only had three down days. However, we are very short term oversold so we should see a bounce by Tuesday at the latest. The textbook way a market gets oversold is to go down a few days, have a relief bounce then go down for a few more days. We are likely nearing the relief bounce. Have a great weekend.

Still Neither Here Nor There

I was hoping that the market would get maximum overbought and that bullish sentiment would get excessive. This would have likely led to a good selling opportunity. Instead the market declined before  this scenario could play out. Unfortunately we are nowhere near being oversold yet either.

I see little edge from my indicators in betting on the short term direction of the market. Rydex traders are way too bullish while we saw excessive put buying the past two days at the CBOE. I am getting mixed signals galore. Market participants are nervous about the election in France this weekend and today's employment report. These events will soon be behind us and hopefully this will lead to market participants making up their minds.

Where We Stand

As I outlined yesterday the market will be maximum overbought somewhere between the close of business today and the close of business on Monday. I would prefer if we rallied through Monday because sentiment is not lining up for a drop. I look at many factors and prefer if all the ducks are lining up.

Currently, the only factor I see pointing to the downside is the upcoming overbought reading. Sentiment does not seem exuberant to me but if we rallied through Monday it might get there. Yesterday, there was heavy put buying on what was a slightly negative day. I don't know why the recent rally is not making people bullish. Maybe its because Apple has not participated?

A Portfolio Of Issues

When I look through my portfolio the most common theme I see is that the companies I own have issues. There is not a clean story in my portfolio. Vodafone offers a double digit free cash flow yield but has some problem spots. They have exposure to Southern Europe but that is a small part of their business. They also have a 45% ownership stake in Verizon Wireless among other assets around the world. But the entire company trades like its a pure play on Spain.

I believe the reason companies with issues trade at ridiculous valuations is due to the dominant investors, hedge funds. There is so much pressure to perform in the short term that nobody wants to look past any issues regardless of valuation. If a position goes against them they "manage risk", which is the same as taking a stop loss. This makes  cheap stocks get even cheaper.

I believe this creates opportunity for those who are patient and willing to endure some pain. I have been enduring my fair share of pain recently as companies I believe are dirt cheap have become cheaper. In the end I expect I will be rewarded.

Explaining The Overbought

Below are the numbers we will be dropping from the NYSE Advance-Decline line for the next ten days.

We become overbought when we are about to drop a long string of positive numbers. That would mean the market spent the better part of the last ten trading days going up. This is an exhaustion indicator so a ten day period where the market is largely going up usually leads to a rest.

The next two days we will be dropping 2 negative numbers (-1,018 today and -520 Thursday), which is why we are not yet maximum overbought . Starting Friday we will be dropping positive number for the next 6 out of 8 days. Starting Tuesday we are dropping 4 negative numbers in a row. If the market continues to climb I would expect it to become exhausted somewhere between Friday and Tuesday. This is not to say that we will go up further. Only that if we do those would be likely points of exhaustion.


I learned this technique from reading Helene Meisler on RealMoneyPro, which I now chart for myself. She does an excellent daily newsletter using this technique and others.

The First Day of May

The first day of May is seasonally strong. According to SentimenTrader.com May 1 has been positive 12 of the past 17 years and the losses were small on the losing years. The market is still very short term overbought until the end of the day,but we would get a much better reading if we rallied into the end of the week or early next week.

I believe the most likely outcome is that the market manages to claw its way higher in the coming days. Sentiment has room to improve and there does not seem to be much in the way of news to stop the upward momentum.