Burton Malkiel, author of A Random Walk Down Wall Street - because of course we all know that stock prices are subject to completely random movements - is starting a hedge fund to "go long China."
This story really is too good to be true. Chinese stocks quietly topped last August.
Burton is timing the random walk into a downtrend perfectly.
Usually we see ultimate contrarian indicators like this near a top, but mostly still on the way up - this is a special treat to get one while we're on the way down. Especially as the Shanghai Composite moves below it's 200-day moving average.
Awesome.
Hat tip to Porter Stansberry for writing about this in the S&A Digest
Last week, I mused that I thought the markets had turned down, but that we'd need torespect the moving average before being 100% sure.
We're not there yet...but we're gaining ground fast:
The S&P looks destined for a date with its 200-day SMA.
Note that the moving average is very good at catching the meat of a move, but is not good at catching turning points.
For example, if you'd have been waiting for the upward break through to get long in 2009, you'd have missed nearly 300 points of the S&P's move up.
Still, you'd be sitting on profits right now, and, perhaps more importantly, you'd have a stop-loss waiting for you that would lock them in.
The markets are oversold right now, but during bear markets, that condition can occur for quite some time.
We'll try to identify a couple of things in particular in the weeks ahead, namely:
When the markets have definitively resumed their downtrend, and
Identifying appropriate moments to add to short positions
Another Good Short: The Euro
As crazy as the US indices look at these levels, it's hard to see anything attractive about the Euro at these levels.
Fundamentally, it's quite overvalued when compared with the Dollar. It appears to be at the start of a major downtrend, in perfect accordance with the markets throwing up all over themselves.
AND, with the Dollar continuing it's ascent, the Euro looks poised to get trashed in a big way. As big of a mess the US is, Europe is arguably an even bigger basket case. The Euro could easily revisit parity with the dollar at the end of this move.
Bearish Venture Capitalists
On Thursday night I attended a technology startup discussion, featuring three Bay Area venture capitalists on the panel. It was a very good lineup, with one guy in particular that I enjoyed and seemed to identify with (perhaps it was his "get out of our way, government" mantra).
He brought up an interesting point that many stimulus funds will dry up by the end of Q1, at which point the next shoe could drop. I thought that'd be a perfect fundamental backdrop against the technical warnings we're seeing right now.
You know the math - the markets turn down, and then the fundamentals reflect the technicals. Pundits will say that the market is a "forward looking mechanism", hence it discounts improving or deteriorating fundamentals 3-6 months ahead of time.
Personally I find that to be bogus business school logic, as I prefer to think that rising asset prices eventually are reflected in rising fundamentals, which is a more logical sequence of cause and effect than the crystal ball theory.
In any case, with markets starting to circle the bowl, the evaporation of stimulus money in 3-6 months would be the perfect fundamental "reason" for another downturn, that appears to be starting right now.
Not Good When Stocks Drop After Good "News"
Good friend Brian Hunt has been on the Intel beat for the past 16 months - he's been using INTC's stock price (quite successfully) as a leading indicator of where we're heading.
On Tuesday he pointed out in his Market Notes that the "short term circle is now complete." Last April, Intel reported bad news, and the stock shot upwards. Last week, Intel reported great news, and the stock was subsequently hammered.
Interestingly the business fundamentals look great at Intel - perhaps another justification that the fundamentals are often the last ones to go.
Anyway the INTC worm appears to have turned, which is another foreboding short-term sign.
China Starts to Slam on the Breaks
We've wondered before how the global economy would fair if China, the posterchild of world economic activity, faltered.
I don't see how this can end well, at least in the short-term. And the folks at Stratfor are raising the same questions:
Fine Dining Turned Cafeteria Comfort Food
Think good times are back? Think again.
Granted my hometown of Sacramento will never be confused with San Francisco or Manhattan, but it does boast a small but impressive lineup of fine dining.
As this depression unfolds, I'll bet we'll see more fine dining establishments rebrand themselves as cafeteria-type establishments...hopefully without the tasteless steamed vegetables.
Because that's how things roll, here in Lunch Lady Land:
Still looking good on the short S&P trade. This position looks like a keeper.
Short the S&P - this time it's working out, so far.
Would love to add to this, but I'm still not 100% convinced that this turn down is The Big One. I think it is, but am waiting for a breach of the 200-day SMA as the "oh shit" point.
Shorting the Euro, and alternatively going long the Dollar, would also appear to be good trades. They are "all the same trade", after all!
Have a great week in the markets! Comments are always welcome and very much appreciated.
I'm a day late publishing the weekly update this week, partially thanks to the NFL conference championship games. I normally write on Sundays, but instead devoted yesterday to three great American pastimes - gambling, drinking beer, and watching football.
Of note to us speculators, the Colts and Vikings both received a slight edge in public betting percentage (usually a slight contrary indicator in sports betting) - and both teams covered their respective spreads. (The Vikings lost the game, but they were winners in my +3.5 book).
The Market's New Trend: Down?
Has the trend of the market (finally) changed from up to down? We got fooled in November, so I'm hesitant to call a downturn until we see a break of the 200-day moving average to the downside.
We're not there yet, but there are some signs that this could be a resumption of the bear market - a lot of people forgot that we are in a secular bear market - which is exactly what bear market rallies are supposed to do.
At risk of speaking for the rally, I believe it's accomplished everything it could have hoped to do back in March - it's rallied for almost a full year, retracing over 50% of previous losses, and has convinced many "experts" that the worst is behind us.
It'd be a perfect time for the S&P to start a violent drop below it's previous March lows.
Gotta Respect the Simple Moving Average
The red line below represents the 200-day Simple Moving Average of the S&P 500. As you can see, if you'd have simply been long stocks when they are trading above their 200-day moving average, you'd have been in good shape.
And conversely, you'd want to have been out of stocks, or even short, when they are trading below the 200-day SMA.
The S&P is still comfortably perched above it's 200-day SMA - for now.
(Source: Google Finance)
This indicator actually works quite well for most asset classes, and even individual stocks. Here's a neat write up that DailyWealth did on this in the context of Mebane Faber's "Ivy League Portfolio" a few months back.
Bottom line: A downturn may have started, but if you want to be safe, wait for a decisive break of the 200-day SMA.
So far so good on the S&P trade, as it fell hard and fast last week. Friday, granted, was on low volume. The push back up today was meager.
Short the S&P - this time it's working out, so far.
Playing devil's advocate, every market correction thus far has been fairly shallow - about 5%. We're in that range now. So if the uptrend is still in place, we'd expect to see a resumption upwards about here.
So I am not in a hurry to add to this short position yet - I'd prefer to see a breach of lower levels, and a confirmation of a downtrend in place. I expect the markets to fall at least 50% from these levels, so I'm not in a particular hurry to get short.
Have a great week in the markets! Comments are always welcome and very much appreciated.
James Altucher of Formula Capital rants about the scam that is home ownership in America.
As a renter myself (a renter in California, no less!), I ate this clip up. I still remember feeling REALLY dumb in '03-'05 when everyone was buying property that "never went down" - at least not in Northern California.
Now with unofficial unemployment in Sacramento County pushing 17%, and home prices off their peaks by 50%, the common wisdom has changed a bit!
Still, I don't think we've hit bottom - not as long as we're still in the early stages of a Depression. I'm only interested in buying property if it's for $0.10 or $0.20 on the dollar - which I think there's a chance we could see, if we get the complete fallout that Bob Prechter & Co are calling for.
Stumped about the inflation/deflation debate? Good news - you're not alone!
Hard Asset Investor's Brad Zigler is also somewhat undecided on the subject. Though he leans toward inflation, he acknowledges that very strong deflationary forces are also in play.
Though you know that I'm one of the lonely souls in the deflationary camp (along with many readers!), I also am not 100% sure of which way things are going to unfold.
But that's OK - that's why we follow the trend! Ultimately, the market will be the final arbiter of this debate, and there's nothing we can argue today that will change what the market is going to do.
So, grab your position, but by all means, be flexible and ready to change if we're proven wrong. Personally, I'm watching the stock market, and the dollar...especially the dollar. If it takes out it's old lows, that would indicate a serious flaw in our dollar rally/stock tanking scenario.
That looks unlikely right now, though, as the dollar looks to be at the start of a major rally.
