Don't Ignore Your Hidden Fears

Recently, on CNBC and on Mad Money (Jim Cramer's one-hour show on CNBC), I've seen (as I've seen very often doing market downturns) a strong recommendation to find those "accidental high yielders." And it's not only on CNBC, every station (radio and TV) during their business slots find pundits that recommend this strategy.

We know the strategy...find those stocks of Fortune 500 companies (i.e., solid companies) that normally offer decent yields and, when they are unfairly punished along with the rest of the market, pick them up to take advantage of their "accidental" high yield. Let's call these AHYs.

We can only assume that the reason that these yields are referred to as accidental is because the strong belief is that the price reduction of these AHYs is truly temporary and that their yields will be maintained regardless of economic directions. This seems to me a bit like fortune telling, in that these pundits want you to believe that they can see the future. They can't, as confirmed by the banking industry's near collapse in 2008/2009, so beware of these recommendations.

More importantly and to the subject of this post, don't ignore your hidden fears. Assuming that the pundits are right and these AHYs will maintain their yield and the selloffs in these stocks are temporary, then picking up these AHYs will be a great move as part of your long-term investing strategy.

BUT...most of us have a very innate fear that we don't admit to until it's too late...we hate losing money and we really get scared when things, particularly our portfolios, start falling like there is no bottom. Our long-term investing strategy generally goes out the window in bear markets when selloffs can often seem precipitous. And we often sell what we have held for the least amount of time...i.e., we have a LIFO mentality (Last In, First Out). It takes us time to love the stocks that we acquire so the most recent purchases get sold first.

So those AHYs that seem like a great buy may eventually turn into a great investment...unfortunately, during a bear market, MOST of us will sell the AHY we just purchased in the next leg down and thus take another brutal hit in our already battered portfolio.

Remember two rules in bear markets...nothing is a "great" buy and things generally become far cheaper than one expects before the market bottoms.

Note that the market appears to be inviting us back into the water (with a 60 point rally in the S&P in the last 2 days)...but as I noted in my last post, this selloff is nowhere near from being complete. Be safe, be nimble and don't ignore your hidden fears.

The Recession Line

As it appears that the markets are not at all in the mood to head higher and, in fact, looking at where futures are playing out right now, will likely be headed lower in the near term, I began tracking back to see where we could find some level of support.

When markets have gone through the multi-year rally that we have all lived through over the past 2 1/2 years, it's important to recognize our own biases. We will all be tempted to jump in sooner rather than later on any minor selloff in the equity markets, hoping to continue riding the powerful 100% rally in the S&P 500 that we saw unfold between March 2009 and April 2011 (hope you caught our call for a generational bottom). In fact, it is this tendency that often keeps bull markets running far longer than many expect them to.

Thus longer-term trendlines, if they can provide some historical support as relevant, are critical to monitor and effective deterrents from reacting too quickly and too soon. In a bear market (as we are in now), the speed of the decline will ruthlessly punish overly anxious investors.

To generate a sense of where we might find support, I looked back to the selloff last July (the one that sent Barton Biggs into a tailspin and put him through his now-famous 3-week reversal) and drew a trendline where we found support at that time. The level is at S&P ~1027.

This is not incredibly exciting as it is only one data point of support...what is interesting is what happened when I extended the trendline back 20 years and looked at the S&P on a monthly basis.

Notice that the 1027 line was not only a support level in the July 2010 timeframe, but was tested over 3 months in late 2009 as market participants looked to see if the bounce off the May lows was sustainable.

The 1027 S&P level was also tested in late 2008 shortly after the Lehman collapse and the break below 1027 resulted in the largest 1 month selloff in the S&P over the last 20 years (and probably ever). Even further back, it was in October 2003, when the market broke above this level that industry experts began calling for the end of the recession. It was also a test of this level over 3 months in late 2001 (Sep - Nov) and a subsequent test and failure in June 2002 that sent us into our dotcom recession. Finally, it was this same level that was tested and held in the 25% correction in late 1998 (who remembers this?) that preceded the 60% market run through March 2000. With the amount of historical support for the 1027 S&P level, I would argue that this trendline represents the Recession Line...a break below means we are heading into our 3rd recession in the last 12 years, a real possibility given economic conditions.

Now, not to be too exact, one could also argue that a similar trendline, at S&P 1100, found similar support over the last 20 years and this level may hold again as it did last week (we can only hope...). The only difference is that this will not signal a clear bottom.

It appears that the Relative Strength Index of the S&P (on a monthly basis) approached the 25 level at both the 2002 and 2009 bottoms. With the monthly RSI currently at around 45, I am afraid that the historic Recession Line may not hold this time.

As the old adage goes, only fools (and bullish investors) try to catch a falling knife.

Temporary Bottom?

We're down 10% at this point from the highs and the S&P just touched what was previous resistance for the S&P back in April and November 2010 prior to the move higher that ensued early this year. I imagine if there is a level for the market to relax and look to recover, this may be it.

I will also point out that volume is screaming higher here...usually a sign of market extremes...

More to come as the day unfolds...

Calling the Top

So…I thought today might be it…

• new quarter (i.e., past the requirement for hedge funds and mutuals to buy into the close of the record 1st quarter - referred to as "institutional window dressing" or the "art of looking smart")…
• great jobs number creating a pop at the open creating the final death knell for shorts and rallying cry for bulls
• all culminating in a realization that this may be the best we'll see in a while with crushing commodity prices...expectations for higher rates coming sooner than later...leading to…a collapse by the close…

But now I am not so sure…one of the 7 long positions I exited this morning was at 68 when I got out at 10am EST…it’s now at 73 – 3 HOURS after I sold it…another was at 19...now approaching 20...so I am picking them great, but getting too skittish to keep holding. Another few positions are making remarkably strong moves after signaling alerts in the morning, which I decided to ignore due to my bearish sentiment…three of the four positions that I was alerted to are up 3% at least since 10am EST.

I also noticed that the Dollar rally has completely imploded and that the Dollar is now pushing for a closing low (against the Euro at least) not seen since 2009 (needs to close above 1.4207 – it’s at 1.4219 after getting down to 1.406 in the morning)

Of course the tell-tale signs of a top are still ther...volume again running low – oil up another $1 - approaching $108, VIX getting crushed again - i.e., complacency rampant, the usual Cramer suspects and market high-flyers are rallying ... BUT not in unison...many are up, but some are flat and a few others are getting crushed.

Still - this continues to be one of the toughest market to gauge in a long time...

Trendlines

I drew this amazing trendline back a couple of days back and just extended it out today and it is AMAZING how the SPY has been hugging this exact trendline for the last 2 hours…a break below this (131.67) convincingly takes us to the next line (130.71) – hoping to see all of this today!

Is the Market Rally Done?

Facts:

The market has just made its first foray below the 20dma (twenty day moving average - a commonly used technical indicator) since the breakout in early March - been below for the last 2 trading sessions - note that all graphs below depict the Nasdaq Composite...

In 2003, the market made its first foray below the 20dma around the same timeframe and stayed there for 3 trading sessions, during which time the market sold down about 2 1/2%. It did not step below the 20dma again till another month had passed...it stayed there for about 2 weeks, in which time the market fell no more than 2% OVER THE ENTIRE PERIOD...it did so again just a week later and stayed there for 3 weeks...the market fell a maximum of 3 1/2 % during this time frame - we then had a six week rally...
In 1995, the market made its first foray below the 20dma 3 months into the rally...and stayed there for 3 trading sessions, during which time the market sold down 1/2% - the market was far less volatile during this time frame...the market then rallied 15% over the next 5 months before falling below the 20dma again...remember, we were far less volatile...a 15% move in under half a year was unheard of at that time...
The question is...are we in 1995, 2003 or 1929/1930? Without a shred of doubt, and buoyed by the 14 new stocks on my radar from Friday's activities...I say we are in 1995...do your diligence...

The Dilemma of Discipline

So, it's been a while since I've posted here and this is simply because time has been difficult to find. I hope to not disappear for this extensive a stretch again. The market's storm higher since the March 9th lows has been dramatic and powerful...six weeks of some impressive individual as well as index gains...establishing a new bull market, albeit only technically.

Many in the analyst community are understandably skeptical after the collapse in both equity markets and the economy that began back in July 2007. Most bear markets stage these powerful rallies that fall apart all too surprisingly for the bulls that jumped in, afraid to miss the party. This run up has been referred to more often than not as simply a bear-market rally, by many of these skeptics.

As I argued back on March 12, my strong opinion is that we have put in a generational bottom. When coming off a generational bottom, almost everyone can make money in the first leg up, as this first move is often powerful and undiscerning...every index, every stock gets a boost. It is the truly disciplined at this time that pick not just the followers, but the leaders in this rally and grab the massive returns. Now, here's where I make an important point - in this blog, I cannot and thus, will not, identify individual stocks, but I will try and guide my readership on general observed market trends and industries where the investment opportunities are high.

The market today staged a strong powerful reversal

• Many skeptics will point to the high volume selloff today (ignoring the fact that one stock made up the entire increase in volume and then some). These skeptics will say the market has run enough - six weeks is enough for a bear market rally - these are the bullish doubters who expect us to make new lows, so that they can buy as they likely missed out on the first run.


• Other skeptics will point to the fundamentals and say that there is still lots of bad news to come - these are the lifetime bears who believe that every downturn is simply a stage for a further downturn. They believe that unemployment soaring from 4.7% to 8.5% is just the start, that the collapse of some our most powerful institutions in barely a year is not a sign of a healthy capitalist economy, but an indication that every great company in this country should fail. These are the bears and to allow them to drown out the positives is to give in to the fear.

But, a reversal like this is not a time to run to the exits nor is it a time to load up the truck...it is a time for discipline...and discipline means evaluating the markets without the noise of pundits. It means evaluating all the news without listening to simply today's news. And it means evaluating each holding to determine what to do with each share in your portfolio - some may need to be sold, others may be added to and the remainder may be holds...but each holding in one's portfolio needs to be re-evaluated.

The easy response in any reversal after a powerful rally is to be happy with one's profits and run into the nearest cave. The naive response is to think that every pullback is a buying opportunity. The difficult response is to be disciplined. The dilemma of discipline is that discipline is often hardest to find at times like this ... when the easy or the naive response are the first responses we gravitate to. But without applying discipline at this time, one will either regret selling too early or buying too soon. I think, overall, the trend will follow very close to the 2003 rally that begin March 10, shown here, and that the rally will storm higher, after a maximum of a 3-day pullback. But as I said earlier, the easy money has been made. The rewards now will go only to the most disciplined. Everyone else should just buy index funds.