Monday, November 29, 2010

Waiting for Santa Claus Rally

Things look gloomy. Markets are going down. We are bombarded by bad news. Europe is falling apart, again. States are gonna default on their debts. Banks are lying about their exposure to (choose any number of) Europe, bad mortgages, bad corporate loans, bad personal loans etc.
And I am turning optimistic. There are reasons for that.

First of all, there is one obscure technical indicator: 13-day moving average. Since July of 2008 it was pretty consistent showing current trend. When one of major indices (Dow, S&P or Nasdaq composite) crossed above it and stayed this way for more than 2 days, index went up for several weeks. Same thing (with opposite sign, of course) happened when index crossed under 13-day MA. So, last Wendesday, November 24, Nasdaq composite crossed above 13-day MA. And it closed on Friday and today above this line as well. This is a bullish sign. Dow and S&P are still under 13-day moving averages. But for the last couple of years Nasdaq Composite was leading Dow and S&P.

Then let's take a closer look at current fears. Europe is not going to fall apart. They have enough money and enough will to save their economies. Yes, several countries are under attack and can't refinance current debt obligations at reasonable yields. I think we see classic bear attack coupled with media hysterics. I don't know if press is hired by bears or acts on the premise that bad news sells better than good news, probably both. But reality is that Euro zone has a big fund, more than 800 thousand Euros of emergency funding and they can double this fund without much trouble. Add to that possibility (I think necessity) of European Bank doing its version of QE, that would be enough to cover needs of every country in trouble.
States are in more precarious position. But nevertheless, state bonds are selling well, yields are not that high. And I think Uncle Sam will come to help in case of emergency. Because default of a big state would be a disaster for the whole country. I can't even think what default of California would look like.

The main reason for my optimism is seasonal. Historically last month of the year is bullish for stocks. Santa Claus rally usually comes after Black Friday. I expect it this year too. Because economy isn't that bad. Because employment picture is improving, albeit slowly. Because life is still going on, despite all the gloomy predictions in media.

Full disclosure: author has long position in SNF, which is CEF invested mostly in Spain and in CEV, which is CEF invested in California state and municipal bonds..

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Tuesday, November 16, 2010

Sliding Slope

Big day down. But that's not the problem. The problem is that all metrics are pointing down more.


Not good. Economy is kinda growing, but slow. Unemployment is still high. Banks are not lending and businesses are not trying to get more credit. QE2 so far only managed to scare everybody into fixed income and commodities and now this trade is unwinding. Company after company predicts uncertain outlook. Worst of all, inflation is nowhere to be found, unless you listen too much GOP BS.


Broken. Indices closed third day under 13-day moving average and closing to 50-day MA. Trend is fresh and good, probably all way to 200-day MA.


Too many bulls everywhere. That's not good either.

My take, this downtrend is going to continue for a while. We might get some reprieve (should get one tomorrow), but fall rally ran out of steam and markets need some time to readjust and recover. I still think that we might get another rally in December (Hey, Santa, where are you?), there should be window dressing.

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Thursday, November 11, 2010

Not Buying Cisco Back

I'm watching "Fast Money" right now and decided not to buy Cisco (CSCO) back for a while. Maybe some time later. But not now. The reason: just everybody on Fast Money said that stock is undervalued. Yeah, right. These guys are quite representative of Wall Street. If Wall Street thinks that something is a buy, I'm not a buyer. They probably already bought their positions (some of Fast Money guys did) and now waiting for stock to go up. Good luck, guys!
Apart from that, I absolutely don't like two points of Chambers interview on CNBC:
1. Most of the missed demand is from government entities. This demand isn't coming back any time soon.
2. Predicted growth is in range of 8-10%. Doesn't work for P/E 15. Not unless company starts paying sizable dividend.

Full disclosure: author was long CSCO until November 9 and doesn't have any positions in stock right now.

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Tuesday, November 9, 2010

One More Junction

Stock market is at another junction point. We had a great rally which started in August. As many, I didn't like this rally initially, because of correlation of stock market to commodities and reverse correlation to dollar. But rally just somehow felt right. Couple more factors fueled this rally: elections with expectations of GOP big win and promised by Fed QE2.
Elections didn't disappoint. GOP shouldn't celebrate much though. People don't vote for, they vote against. In this case they voted against obvious socialist tendencies of the administration: healthcare reform (which is not going anywhere), attacks on big businesses, Wall Street and stock market in general. They did not vote for neocons, they did not vote for social conservative agenda, they actually didn't vote against stimulus and even the horror of horrors: higher taxes for rich.
QE2 didn't disappoint either. Uncle Ben even slightly exceeded expectations. I don't have much hope for it, but it's the theme of a separate article. Anyway, QE2 is a long term story. We need to know what to do now.
And it's complicated. If rally was mostly caused by elections and QE2, then market is going down: sell the news. If it was driven by stupid idea that dollar is going to be worthless and we are going to have hyperinflation, then it should continue. Of course, it's almost the end of the year, and various window dressing strategies should come forward. Most funds should be buying stocks, to make an impression that they participated in the rally.
Metrics don't say much. Technicals are great, but they are always the best at the top. Fundamentals are improving, but they still stink. Sentiment is about neutral.
We had several sharp corrections during the rally. That's how it should be: biggest days up happen in bear markets, biggest days down - in bull ones. But last two days are different. We are going down bit by bit, which is more consistent with the top.
I'm not sure it's a top. We might as well have the rally continue into the year end. But it's a possibility. So I decided to lighten up a little bit, it's time to get more careful.
Today I closed my position in Cisco (CSCO). Reason: stock was bought after last earnings report, when it was punished too much. Tomorrow is another earnings report, and I don't know how that is going to play out But my cash position is a little bit too big, so I decided to invest in a muni CEF: Eaton Vance California Municipal Income Trust (CEV). Fund trades at discount to NAV (a rarity among muni CEFs) and has a decent yield.

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