Month: August 2013

 

Results are in on yesterday’s Buy The Dip Or Run Like Hell Poll and the dippers are holding court by a count of 61% to 39%.

Perhaps, the majority of my readers have been conditioned by the strong tendency of stocks to bounce back with gusto after every pull back we have seen in 2013.

$SPY

 

Here’s today’s interview at The CME Group. I was joined by Paramount Options’ President Ray Carbone and we talked crude futures.

Ray’s biased higher and while he takes note of critical levels, the thesis he lays out revolves mostly around budding economic recoveries in China, noting the recent spike in iron ore, and the EU. He’s also minful of the uptick in violence in Iraq which is more important, he thinks, than Egypt, given increasing production there.

Take a look:

$CL_F $GC_F

 

The negative reaction to Elon Musk’s Hyperloop plans is no surprise to me. Pundits love to tell you why things won’t work. This is how they sell the advertising,

And sure, it sounds ridiculous, a 30 minute tube ride from LA to San Francisco or whatever. I’m sure if you would have told someone living in the late 19th century that their grandchildren would fly from NYC to Paris for their honeymoon, they would have thought you were crazy too.

People have a hard time imagining the future and that’s just human nature I guess.

Anyway, the negativity reminded me of this post from Fred Wilson who, for those who don’t know, has been an astute investor in early stage companies for the past 20 years. Think Twitter, Tumblr, Zynga and Mercado Libre just to name a few…

In his piece from earlier this year titled Return and Ridicule, Fred wrote,

I have found that return and ridicule are highly correlated over the years. We have made more money on things that were highly ridiculed than on any other cohort. When I see people laughing at ideas and companies we have backed, I smile. It means we are going to make a lot of money on that investment.

I saw Bill Gurley say that you can only make money by being right about something that most people think is wrong. His logic was that you can’t make money by being wrong. And you can’t make money by being right about something everyone else knows. So you have to be right about something that most people think is wrong. I really like that framework.

So I get really excited about the Hyperloop when I hear all of these reasons why it can’t work.

 

Last week, the S&P 500 fell 1.06% to 1691.42 from the all time high close the week before of 1709.67.

Hardly a rout.

Yet, on this week’s Bespoke Sentiment Poll, bearishness hit a 2013 high with 62% of respondents seeing a lower $SPX one month out and 38% seeing higher. The week before, the reading stood at 56% bulls to 44% bears so there was a one week 18% increase in near term gloom.

This type of reflexive steep spike in bearishness has occurred all year on even the shallowest of dips and I have been writing and speaking about the phenomenon in detail since March. From my point of view, this is nothing less than the ingrained character of the collective market participant.

Two things matter here: 1) Traders and investors are innately anxious and get scared on the first sign of weakness and 2) These bearish spikes signal premature washouts and act like an index put, actually buoying the market and muting steeper declines.

Sure, we can get a larger correction and even take out the critical 1670’ish support on the S&P’s, but this is not how bull markets end.

$SPX $SPY

 

This morning, I spent some time with my boys teaching them about the stock market. We do this from time to time and I think its worthwhile, especially if you are involved with markets on a daily basis, so that they gain some understanding of what you do.

I’ve written about this before here and focused on General Mills and Cheerio’s which is a breakfast cereal they eat all the time and so are very familiar with. A note about that piece that I didn’t mention at the time. Kids, even young ones, have the ability, to varying degrees depending on their developmental level, to recognize patterns and so they will get price behavior analysis much better than you might think. You will be surprised.

This morning we took a look at Disney, which is of natural interest to them too. I bought them each a few shares of the stock and from time to time we take a look to see how its doing.

Disney is a natural for them because they love Mickey Mouse, Lightening McQueen, Spiderman and the like and this morning we focused on 2 areas.

1) Some large companies are made up of multiple businesses and so we looked at Pixar, Marvel and the theme parks.

2) We examined market capitalization as a product of share value times total number of shares. We broke out the calculator and a piece of paper and pencil, and multiplied 64.73 (share price) x 1.8B (shares outstanding) and compared our answer to market cap.

So we got some conglomerate corporate structure and some serious math in which was nice.

Some keys to the process:

1. Choose a company that kids have an interest in. Disney and General Mills are natural choices. Here’s a pic of Max from this morning wearing his Spiderman suit so you know he gets Marvel which is owned by Disney.

 

 

 

2. Join them where they are cognitively. Here’s a simple way to gauge what your kid can and can not understand. If you begin showing them something and they change the subject, they don’t get it so move on. If they ask you a question, then you have them hooked.

3. Buy them a few shares of companies they might be interested in and show them that you have done this in their account. In general, they love this and they might even ask you to look at the price from time to time or even the stock chart if you have shown them this before.

4. Just have fun with it. Everything is play to a kid. So if you play stocks with them, they wll join the game.

5. If you are a commodities trader, introduce them to Cocoa Futures. They probably love chocolate.

$DIS $GIS $CC_F

 

On this week’s Hangout, JC & I discuss the S&P 500 – still holding the critical 1670, regional banks – showing signs of weakness, natural gas – reversal in progress & preseason football – w00t!

Have a look:

$SPY $KRE $NG_F $BBRY

 

Some of you are familiar with the on tilt phenomenon from the poker world.

If you’re not, it goes like this. Tilt sometimes occurs when a poker player experiences a bad beat or a series of them. After the beat, the player loosens dramatically playing more hands, increases risk irrationally and acts out. Often this leads to a quickly blown stack of chips.

This is not something that only novices do. If you ever watch The World Series of Poker on ESPN, you’ll occasionally see a pro lose a big pot and then, on the very next hand, get caught up in a hand that he or she should not be in.

You can see this happening now with Bill Ackman.

Ackman’s bad beat was (and still is) Herbalife where he is getting hammered by Icahn, Soros and a heavily shorted stock that looks great on the chart and keeps rising.

So, onto the next hand, $JCP, where Ackman appears to be behaving irrationally.

As Jeff Mathews writes,

But his gambit yesterday—leaking on CNBC a letter to the board of JC Penney, of which his hedge fund is the largest shareholder, that urges pushing out the same CEO he just brought back (Myron Ullman) after pushing him out once before in favor of ex-Apple genius Ron Johnson, who pretty much destroyed the JC Penney as we knew it in favor of a slicker, more upscale thing called ‘JCP’ (the stock ticker, get it?) which JCP’s customers did not get at all, and from which they left in droves—smacks of desperation.

The dynamics of tilt can be understood best by way of prospect theory. Prospect Theory stems from the research of Kahneman & Tversky and suggests that humans sometimes neglect probabilities and make decisions based, in part, on whether they are framed by losses or gains. The implication is that humans are inherently loss averse and prefer to avoid losses at the cost of rational decision making.

Kahneman and Tversky put it this way: Losses loom larger than gains.

So people hate to lose and when they are faced with the prospect of loss, especially in a big way, they tend to act more on emotion  than expected utility. In the case of tilt, the player will try to avoid the realization of the lost chips by attempting to get them all back at once without consideration of the odds.

In the case of Bill Ackman, the $HLF loss is shaping up to be a big ugly bad beat and very public one, so not only are we seeing the behavioral effects of loss realization avoidance but we are also witnessing a large ego bruised at the hands of two of the biggest (Soros and Icahn) to ever play the game.

The rational response to a bad beat is to do less and risk less not more which would probably be the move for Ackman to make here until he can get his head together with the $HLF situation.

 

 

 

Last night, JC Parets and I chatted at the CME Group’s NYMEX.

We backed up the lens and focused on Treasury futures and what a topping process looks like after a 30 plus year bull market in bonds. Its fascinating to watch this play out over an extended period and JC points out that 4% yield will be critical if and when we get that.

We also walked through weekly charts on Cocoa, which looks bullish here, and Gold.

Take a look:

$ZB_F $CC_F $GC_F

 

Damion asks…

Phil, How do you know when a stock is broken?

I asked a few esteemed friends who measure and trade price…

@alphatrends: 2 ways… 1. If a stock is making a series of lower highs and lower lows below a declining 50 day moving average. 2. If it gaps down at least 3% on twice its average volume and doesn’t recover quickly especially when accompanied by important news.

@stevenplace: A massive sell off in a stock is rarely a one off event.

@kimblecharting: Short term, when support breaks from a bearish rising wedge. Longer term, when support breaks from a bearish rising wedge and the stock breaks below 50, 100 & 200 moving averages.

@ryandetrick: If everyone is trying to pick a bottom, I know the stock is in trouble. Bottoms form on fear. If price is deteriorating and everyone is still bullish, trying to catch the knife – that is a big worry.

@ivanhoff: One investor’s garbage is another investor’s treasure, so the whole concept of a broken stock is subjective. That said, stocks that are making 52 week lows during a bull market are usually there for a reason. Stay away from them. When a high flyer breaks its uptrend, it is no man’s territory where momentum investors are gone or short and value investors are not yet interested.

@chessnwine: A stock is broken when it recklessly disregards logical levels of potential support after previously ebbing and flowing in an uptrend for a sustained period of time.

@annemarietrades: Broken stocks fail to recover near term relative support with each wave cycle. Weak upside action, sometimes seen by tall wick candles. Upside gaps fail to hold and fill quickly. 50 day simple moving average tests on the hourly charts continually fail. Fib retracements rarely recover more than 50% of downward waves.

@allstarcharts: A stock in an uptrend is broken once the primary uptrend line is breached and price breaks the next major pivot low. So, just because an uptrend line has been broken does not mean that the trend has reversed. Confirmation comes when price takes out the next pivot low and you officially have a series of lower lows and lower highs. Here’s a diagram:

@ppearlman: If a stock gets hit hard with heavy volume on a fundamental news event like an earnings miss, its a first sale is best sale situation.