You hear it all the time, "Cash is King". But we forget that it really can be. Not all the time, very few times in fact, but cash does serve a great purpose.
There are a lot of institutions that are not allowed to go to cash, as part of their mandate. The majority of investors, however, do have that option. Why not use it?
You're going to see a lot of the passive investing community advise against cash. "Market sell-offs are an opportunity to buy more at lower levels", they say. "You're not disciplined or smart enough to get back in", they preach. "Just buy and hold and everything will be ok". It's all based off this theory that the market always goes up. I guess if you trust data based off the tiny sample sizes that we have, you'll believe anything.
Crude Oil is down roughly 35% over the last two months as record bullish sentiment unwound and prices fell in what was essentially a straight line. There hasn't been any reason to bottom-fish this market, but today we received our first indication that a short-term bottom may be in.
It's a market of stocks, after all. The indexes are one thing, but the components that drive them are another. Last week we laid out a list of the stocks we wanted to be buying for a December rally. The idea was to get involved with stocks already working, rather than trying to get cute and bottom fish the underperformers.
We'll see how that works out. In the meantime, let's take a look at market breadth.
Whenever in doubt, zoom out. Monthly charts are a great way to do that. On November 30th we got new daily, weekly and monthly candles. This is a lot of new data that we have to work with.
The stock market has spoken and it seems clear that we’re stuck in between some pretty significant levels of support and resistance. This argues for more of a sideways mess type of a market vs a complete collapse, at least for now.
We’ve laid out some important prices where something more substantial would be possible. We’ve successfully held above those key prices. A few examples are Technology $XLK above the 2000 highs, Regional Banks $KRE & Broker Dealers $IAI above their respective 2007 highs. In the indexes, 2660 in the S&P500 is a big one. We’re not going to have a complete collapse if these assets are above those levels. It’s if and when we’re below them that the real problems could start.
All of this suggests that we’re in more of a sideways range type market, at least for now. In that environment, if we’re going to buy stocks, we want to buy strength. I don’t think it’s worth messing around looking for mean reversions. We want to buy what has already been working compared to the rest during the past 2 months of selling pressure.
During our members-only conference call and our trade management post we discussed why a more neutral approach is best as we identify whether equities are going to consolidate at higher levels or begin to roll over again. We also discussed the importance of taking some profits quickly in an environment that produces whipsaws in both directions.
Over the last two weeks we've seen a number of our long ideas failing and more of our short ideas working, suggesting that lower prices are likely ahead in the short-term and that we should continue to err on the short side of stocks. This post will outline some of the evidence we're seeing supporting this thesis, as well as adding a number of short ideas to our trade list from October and November.
I'm on the east coast this week for the Thanksgiving holiday so I came into the city to say hi to friends. Catherine Murray and I had a nice conversation on BNN Bloomberg about US Stocks, Interest Rates and what Credit Spreads are suggesting for overall risk appetite from institutions.
We could not be more thrilled to see stocks selling off. There has been more than enough evidence since the beginning of October to suggest that a more neutral approach to markets and/or selling stocks short has been the best course of action. Passive investing is great, in theory, but markets like this remind everyone that hope is not a strategy. We need to weigh the evidence as it comes in and always reevaluate our thesis.
Over the past couple of years you'd have a hard time finding a bigger US Stock Market bull that me. There was no reason not to be incredibly constructive towards equities. Leaders were leading, consolidations were resolving to the upside and the trends globally were up. We didn't think it made any sense whatsoever to fight that trend, while many others did. Top callers were horribly wrong for a long time.
While updating our Canadian Chartbooks this weekend, I noticed a few that stood out as offering well-defined opportunities where the reward/risk is skewed in our favor. This short post will outline these names and levels, but members can view all of our Canadian Universe by clicking here.
There aren't many stocks in Canada hitting all-time highs right now, but Rogers Communications is one of them. It's a leading stock in a strong sector, so as long as it's above 68.70, we want to be long with an upside objective of 95.25.