Follow your dreams, so long as it's not your dream to time a market top

July 27, 2015

Weekly Post Wrap

I think it's important to bring real life trading issues to the forefront.  Look for more of it in the week's ahead

Trading with your head not right  

Things learned from trading my biggest position in years

Rotation Report - note the part on emerging markets and china.  it's happening.

Top Trading Links was jam packed with goodness

I wrote a stack of analyses on various stocks reporting earnings last week:

Biogen

Amazon

Illumina

Regardless of a correction, bear market or whatever, there are some awesome price structures in the cyber security stocks.

Top Trading Links

What is progress? Progress in education is when you look back and you see things differently. As George Bernard Shaw said “Progress is impossible without change and those who cannot change their minds cannot change anything”.
To be a better market operator, you’ve got to be willing to constantly re-shape (A) how you think and (B) your thoughts. Whether it’s about how the market is acting, how the world works or every our own psychology. Note Ray Dalio for instance. A month ago he was notably bullish on China. Now, as events have unfolded and the market environment has changed, he’s willing to change his mind after taking a beating. Is there egg on his face? Only if you choose to look at it that way.

MARKET INSIGHTS
Ray Dalio on China:
”History has shown that smart investors tend to sell when the government is artificially supporting prices and buy when they are liquidating positions”.
Dana Lyons aka @JLyonsFundMgmt ran an expose on how shockingly poor market breadth is right now:  ‘The thinnest new high in stock market history“.
@KimbleCharting notes the key fibonacci extension in the Dow Industrials. The recent high is going to be a simple tell moving forward:
dow jones price resistance level chart
@IBDinvestors shares how to find IPO winners.
After Monday’s loss, gold miners were as oversold as any time ever on a rolling 5 day basis – via shortsideoflong.com.
Check out @TradingonMark’s Elliott Wave Analysis of oil.
crude oil wave lower prices july 2015
@allstarcharts on long term treasuries:
tlt long term treasuries chart
@hedgopia on corporate bond issuance.
The excesses that took place to fund shale oil/gas projects, for instance, are coming home to roost. Energy bonds that were trading in the 60s and 70s are now trading in the 20s and 30s. All of a sudden, buyers have gone on the sidelines.”

Semiconductors have massively diverged from the market since the ‘M&A’ top in late May. Studies suggest semiconductors and PCs are the new standard by which to measure global economic health. More on this growing concern by @AndrewThrasher

OPERATOR INSIGHTS
Howard Marks on @Ritholtz Masters in Business podcast. My key notes/takeaways:
  • The real success in investing goes to people who achieve a superior understanding of the things going on, why they’re going on and what they mean.
  • If you think the same of everybody else, you’ll behave the same. If you behave the same as everybody else you can’t expect to out-perform.
  • The first job of the money manager is to control risk.
  • We can’t predict, you can prepare …you can’t prepare for everything, we have to do it probabilistically.
“Sometimes, even when you have success, there’s an assumption that that success was based on your process”
“However, with some simple planning and situational awareness, you can be better prepared to make proactive (rather than reactive) investment decisions.” 

RESEARCH & NEWS
Homejoy shuts down after worker classification lawsuits.
Per Gartner, Mobile data growth is expected to grow at a 60% clip in 2015.
Tesla’s future is going to be awesome. Gasoline powered cars are TOAST! by @Ritholtz
The first success in connecting flexible energy devices directly without using wires or circuits.
20 Lessons from 20 successful entrepreneurs.
We’ve heard about the recent soar in euro denominated bonds by US corporations, but nobody mentions we’re only touching 2007 levels.

Thanks for reading!

July 25, 2015

Rotation Report: Not so sexy

The action in the mega cap leaders has just been absurd of late.  For example, take Amazon.  It was already significantly overbought on a weekly time-frame leading into earnings and it just happened to gap up 100 dollars and open 15% above the weekly upper bollinger band (the most since 1999).  You don't see this action all the time.  It's late stage bull market stuff.  But how late?

Chris Kimble notes the recent high in the Dow Industrials is also the 161.8 fibonacci extension from the 2007-2009 range.  That index joins the S&P 500 with the same extension level peak.  These markets are in really in sync.

Heading into next week we have two scenarios setting up.  Scenario A, we bounce soon around this market wide pivot zone.  Scenario B, the market completely shits the bed.  Let's figure out which is more likely.

The S&P 500 weekly chart looks like a disaster with a bearish engulfing week.  I think that's just a timing matter that just scares people this weekend.


But then we look at the daily chart and there is plenty for bulls to work with if they want to buy come Monday or even on further weakness.


Market Measure

Of course breadth is 'scary' divergent.

Dana Lyons did a great job explaining how breadth has massively deteriorated of late.

Looking at the NYSE breadth dashboard, it's leading the market to new lows.


Everything market measure wise is getting scary, The difference between now and a month ago is there is no 'in your face situation' like a Greece that's soon to be resolved.  This action is just coming from weak market internals and poor commentary from corporations.

Even with all this concerning action, there's not much fear in the market per vol term structure.  


The VIX is only trading with a 13 handle.  


This all suggests we should be careful.  Especially with limited upside capped by the major Fibonacci extension levels in the Dow and S&P 500.

For a year I've harped on the major tops in bond market risk appetite.  I've been wrong in thinking it's a coincidental indicator and forced fit it into views particularly last fall..  However, now we have a lower high breaking down that could weigh heavily on the market.


Group Action

Materials have exceeded the downside measured move as we've reached a pretty important bounce zone.


Last week, I wrote on this massive head and shoulders top in Intel.  Why does this matter?  It's 19% of semiconductor ETF SMH.  Now it's broken down and has also lost trend support from 2012.  That's a BIG top.  It's naturally tempting to step into the group, but man this will be an anchor for the group for months.


Random question, why does this XLP chart look like the NASDAQ 100?  Anyways it looks great if it can hold.


The financials have struggled to break above the upper boundary line.  The trend is still strongly higher, the group is also expected to have the second best EPS growth in 2H 2015.  It'll be very interesting to watch this group moving forward.


Other Markets

Friday was the clearest bearish reversal candle we've seen in the Shanghai July rally.  In my book, FXP is the best ETF way to short China.  We could definitely see a test of the low area in the next week or two.


The DAX has reached a moving average confluence.  Even if that were to give way, there is a strong chance this is a bottoming base that's been building since May.


Emerging Markets via EEM is on verge of a major breakdown.  That would be a MONSTER headwind for the market.  I'm looking hard at ultra short emerging market ETFs.


Oil is approaching some new notable support levels. 


While price in the major indices suggest support is near, the underlying action is suggesting there is a very real chance the market shits the bed, eventually.  We've seen plenty of later stage bull market action across the board.  Whether we bounce first and continue to loiter back near 2120 for awhile is anybodies guess.  China could be a real drag on the market and we'll know if that bearish reversal candle confirms by the Monday open.

Trade 'em well!

Reminder:

All ideas shown on this blog represent the authors opinion based on the data available.