Speculative Trading Indicates Rally Losing Steam 40 comments
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A disturbing recent trend has emerged in the U.S. equity market, and many are pointing to it as a potential reason to worry that the massive market rally over the last six months may be running out of steam. Investment strategists are concerned that a recent rise in speculative trading activity is signaling that the market’s dramatic ascent is getting a bit frothy.
This kind of trading is typically characterized by lots of smaller capitalization stocks seeing massive increases in trading volumes and dramatic price swings, often on little or no headlines warranting such trading activity. Indeed, in recent weeks we have seen a lot of wild swings in small cap biotechnology stocks as well as some financial services stocks that were previously left for dead.
For instance, shares of beleaguered insurance giant AIG (AIG) soared 27% on Thursday on six times normal volume. Rumors on internet message boards (not exactly a solid fundamental reason for a rally) which proved to be false were one of the catalysts for the dramatic move higher, which looked like a huge short squeeze.
Consider an interesting statistic cited by CNBC’s Bob Pisani on the air yesterday. Trading volume on the New York Stock Exchange (NYSE) registered 6.55 billion shares on Thursday. Of that a whopping 29% (1.9 billion shares) came from just four stocks; AIG, Freddie Mac (FRE), Fannie Mae (FNM), and Citigroup (C). Overall trading volumes this summer have been fairly light anyway and the fact that such a huge percentage of the volume has been in these severely beaten down, very troubled companies should give us pause for concern.
While not nearly as exaggerated, speculative trading like this is very reminiscent of the dotcom bubble in late 1999 when tiny companies would see huge volume and price spikes simply by issuing press releases announcing the launch of a web site showcasing their products.
I am not suggesting the market is in bubble territory here, even after a more than 50% rise in six months, but this kind of market action warrants a cautious stance. Irrational market action is not a healthy way for the equity market to create wealth.
Fundamental valuation analysis remains paramount for equity investors, so be sure not to get sucked into highly speculative trading unless there is a strong, rational basis for such investments. Companies like AIG, Fannie, and Freddie remain severely impaired operationally and laden with debt.
As a result, potential buyers into rallies should tread carefully and be sure to do their homework.
Disclosure: No position in any of the companies mentioned at the time of writing, but positions may change at any time.
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The AIG and Fannie/Freddie trade is a bet on a return to more nomral conditions. AIG valued at $6 bill is an option on the franchiseand its underlying value. Fannie and Freddie have the US Govt. behind them. All are rich for my blood here but who knows. I could be wrong. Yes it happens.
ari5000 (no relation) is right. You have a Fed and Treasury dept. who will do just about anything to avoid Depression 2.0. Use your heads. Do you really think that you will see 666 again on the S&P.
I have to agree. When someone gives you free money. Take it.
The risk here is that all the stimulus will cause an upside surprise. That is what almost noone sees coming. At 1000 the S&P is priced for a "normal" recovery. Q3 earning will be about $15. That's only about 15 times the annualized run rate. It is hardly a bubble. but if the economy really starts to motor we could see inflation in 2010 and a different picture emerge.
A sudden surge of inflation may cause stock markets to blast off -- a la Zimbabwe.
There's a lot of things bears need to fear... even after the recent rally off multi-year lows. It's very clear that government intervention is at unprecedented levels -- so expect the impossible.
I was just looking at my Motley Caps portfolio. I shorted AIG on Aug. 14 -- I'm down 102% on that pick. I can only imagine what it's like to be real-money short on AIG or C... And I know people who went long AIG/C -- let me tell you, everyone who has the (no) sense to be long those names is high as kite from the money they are raking in. They approach every selloff now as an opportunity to buy the dip and make another fast 10 grand. It's infectious as all bubble markets are. But this is one of the first bubble markets to get a stamp of approval from the Fed -- they created it!
Being in cash is understandable... but being short can be catastrophic when there's no limits to Wall Street's power over the Fed.
On Aug 29 03:26 PM ari5000 wrote:
> And that's the other thing bears don't get.
>
> A sudden surge of inflation may cause stock markets to blast off
> -- a la Zimbabwe.
>
> There's a lot of things bears need to fear... even after the recent
> rally off multi-year lows. It's very clear that government intervention
> is at unprecedented levels -- so expect the impossible.
>
> I was just looking at my Motley Caps portfolio. I shorted AIG on
> Aug. 14 -- I'm down 102% on that pick. I can only imagine what
> it's like to be real-money short on AIG or C... And I know people
> who went long AIG/C -- let me tell you, everyone who has the (no)
> sense to be long those names is high as kite from the money they
> are raking in. They approach every selloff now as an opportunity
> to buy the dip and make another fast 10 grand. It's infectious as
> all bubble markets are. But this is one of the first bubble markets
> to get a stamp of approval from the Fed -- they created it! <br/>
>
> Being in cash is understandable... but being short can be catastrophic
> when there's no limits to Wall Street's power over the Fed.
Taken from The Drunkards Walk "Peering through the Eyepiece of Randomness" by Leonard Miodinow
A lot of what happens to us-success in our careers, in our investments, and in our life decisions, both major and minor-is as much the result of random factors as the result of skill, preparedness, and hard work. So the reality we perceive is not a direct reflection of the people or circumstances that underlie it but is instead an image blurred by the randomizing effects of unforeseeable or fluctuating external forces. That is not to say that ability doesn't matter-it is one of the factors that increase the chances of success- but the connection between actions and results is not as direct as we might like to believe
QE has never worked during debt deflation. Look at Japan, they printed money and it did not work. According to the taylor rule they should theoretically be printing 10 trillion to avoid debt deflation.
Also the bulls place to much faith in Bernanke. The same person who said their was no housing bubble, subprime was contained, fundamentals of the economy are sound, etc. Now he says the crisis is over and the economy is recovering. Who can believe a person with such a bad track record?This guy needs to go back to school to better undertand economics.
Finally, remember that the FED and the government cannot decree economic growth or prosperity.
This major rally appears to have been missed by most of the market gurus.
I have reiterated my bullish convictions quite frequently in various interviews with the Bloomberg's reporters.
One thing for sure ,the current rally is difficult to classify as speculative in nature .The rally may be a logical response to the
the fundamentals which point to above average ,non inflationary expansion in the period ahead and certainly negate the original assumptions of the economic implosion.
Finally , financials have rallied ? Why not .
The provided liquidity via fiscal and monetary policies has stabilized the financial sector that includes AIG ,FRE ,FNM and others.
Until the debacle of 2008 (which I have correctly predicted as early as June of 2005 in an interview with Mark Gilbert),the U.S guarantee of the agencies was implicit only.
I think after giving an access to required liquidity to the FRE and FNM ,that guarantee appears to be no longer implicit perhaps adding relative value to the U.S agencies' equities and bonds.
The rally in the AIG ?Not a big deal so far as allowing for the reverse split ,the stock trades at 2.50 dollars.
I would argue that the current rally is a function of a massive ,speculative short covering .
The real rally lies in the period ahead when the impact of the implemented measures becomes explicitly clear.
In 1999, the dot.coms did not provide enough retracements or pullbacks ... so they did not have enough base preparations to sustain their rallies into the year 2000. They simply kept going up without the necessary corrections to support sustainable upsides. And so they fell like a rock when the wind was taken out of their wings.
Now look at AIG, FNM, and FRE; they kept building their bases from March to July 2009 after an intial vertical rally in early March; it is called a pullback or a correction and a significant one. Naturally, after enough preparations had been made; the ensuing rally has a better chance of sustaining itself for sometime before the next major pullback or corrective action similar to the last one becomes necessary.
There is a good chance AIG will be able to reach the $62 to $75 range but highly unlikely be able to reach or break above $110 upper run rate limit before it will require another major pullback or correction that can last 3 to 5 months.
For FNM, the volume support of last week should be able to sustain further runs into the $2.26 to $2.67 range with upside limit of $3.40 before it will need 3 to 5 months rest. Volume should start tapering off as it approaches those upper ranges on the daily and weekly charts.
FRE and FNM are basically in tandem so they will rise and fall more or less in synch with each other on the daily basis.
It is very hard to make a bet against them when the volume of the last few weeks indicated impulsive runs rather than corrective C-wave run of a normal ABC upside correction or a bear rally or a bear flag as most traders call it.
Obviously, they are in a 1-2-3 Elliott Wave runs to the upside and will need 3 to 5 months of 4-th wave correction before they can execute the 5-th wave rally to complete the 1-2-3-4-5 basic pattern.
After that, they will need bigger, longer and perhaps deeper corrections that should not break the bottom lows in order to sustain further rallies into the years/decades ahead. You may call it resting or healing process or base building or a selloff or even a meltdown; TAs called them pullbacks or corrections. Necessary ingriedient toward building supports to sustain further rallies.
It takes time and time is the essence in such a dibilitating circumstance that should have bankcrupted them immediately.
So unless any or all of them cannot heal themselves and build enough bases in order to become profitable into the years and decades ahead; they have the necessary volume supports right here at this tentative bottom just by looking at their monthly charts.
As for the speculative trading:
More likely investors initiated this rally for AIG, FNM, and FRE. These stocks were completely out of most traders' radars until they made a big move toward the upside.
Traders are already late in the game and are chasing these stocks into the last stages of this rally on the daily charts. They will be the first ones to take profits and perhaps start shorting them down for the necessary pullback or correction.
Investors who were the first ones to see their better than expected financial performances bought at the bottom and most likely will not sell their holdings unless mitigating circumstances force them to do so. They need the next earnings season to finetune their strategies.
ROFL numerous times.
On Aug 28 09:58 PM Peter Daskaloff wrote:
> Today Lehman's stock went up 200%. Yes, that same Lehman (seekingalpha.com/symbo...)
> which went bankrupt a year ago.
The "stimulus" (read: debt) being created by the FED/Treasury is all being strapped to an already over-strapped consumer. The benefits of the added debt go the elite.
If you think this is a prosperous system, then I can only assume you are a staunch supporter of colonial slavery as well? Though (arguably) less cruel, our modern economic system is in principle the same. The slaves do the work, and the masters get the bounty.
Keep in mind that even the most fiscally responsible, conservative citizens are being saddled with involuntary debt. Regardless of your lifestyle, you will be paying your portion of TARP, TALF, CARS, et al.
That is not Democracy, and it certainly isn't the system envisioned by the patriots that fought a war for their ideals.
MM
MM
On Aug 29 01:51 PM ari5000 wrote:
> Everyone's been calling the top for the last 3 months.
>
> Instead of wondering -- why is the market still going up?
>
> There's something new taking place. The Government has essentially
> made an ALL IN bet by stimulating. The govt. has now replaced all
> spending by the private sector and consumers in an attempt to keep
> the economy alive. The financial sector only thrives if the economy
> outside Wall Street thrives. By backstopping the banks, the Fed
> is trying to have the tail wag the dog -- stimulate the banks and
> hopefully, somehow, the financial dealings will stimulate the greater
> economy.
>
> I believe this is why the zombie banks are now leading the pack --
> it's an attempt by the Fed to up-end the nature of the business cycle.
> It makes perfect sense as a government drowning in debt and creating
> more each day -- absolutely NEEDS a growing economy... even if that
> growth comes by simply through inflation.
>
> Predictions of a 1000 point drop are almost ridiculous at this point.
> It shows a total lack of understanding of how a bankrupt entity like
> AIG could rise 100% in the first place. The Fed cannot stop what
> it has started. If the stimulus package fails, they will start a
> new one... TARP, TALF, cash for clunkers, housing credits... I've
> left out a dozen more. A crash? How? The Fed can spend more money
> than the entire world. What could possibly cause a crash when the
> Fed can spend infinite $$ ?? The Fed has supreme power now. Nobody
> can stop them. The taxpayers have no voice. Congress work for the
> corporations that benefit from Ponzi spending.
>
> The Fed has spent an is backstopping bets that probably equal a few
> hundred grand per citizen. All traders need to maximize their share
> of the takings. 90% of the trillions spent will go to a small percentage
> of insiders. We are living in a country that no longer has a rational
> government. The stock market, with zombie banks leading, clearly
> reflects the new mentality.
>
> I feel sorry for those who 'cashed out' or are sitting in gold (which
> the FCBs control an will never let rise) -- they are missing the
> greatest giveaway this generation will ever see. And I really doubt
> this is going to end any time soon.
>
> I can only dream of the next round of programs to come. But I will
> stay fully invested to capture as much upside as I can.
Are you serious?
MM
On Aug 30 05:11 AM aarc wrote:
> There is a big big difference between 1999 and 2009 for these kind
> of stocks and stock runs.
>
> In 1999, the dot.coms did not provide enough retracements or pullbacks
> ... so they did not have enough base preparations to sustain their
> rallies into the year 2000. They simply kept going up without the
> necessary corrections to support sustainable upsides. And so they
> fell like a rock when the wind was taken out of their wings.
>
> Now look at AIG, FNM, and FRE; they kept building their bases from
> March to July 2009 after an intial vertical rally in early March;
> it is called a pullback or a correction and a significant one. Naturally,
> after enough preparations had been made; the ensuing rally has a
> better chance of sustaining itself for sometime before the next major
> pullback or corrective action similar to the last one becomes necessary.
>
>
> There is a good chance AIG will be able to reach the $62 to $75 range
> but highly unlikely be able to reach or break above $110 upper run
> rate limit before it will require another major pullback or correction
> that can last 3 to 5 months.
>
> For FNM, the volume support of last week should be able to sustain
> further runs into the $2.26 to $2.67 range with upside limit of $3.40
> before it will need 3 to 5 months rest. Volume should start tapering
> off as it approaches those upper ranges on the daily and weekly charts.
>
>
> FRE and FNM are basically in tandem so they will rise and fall more
> or less in synch with each other on the daily basis.
>
> It is very hard to make a bet against them when the volume of the
> last few weeks indicated impulsive runs rather than corrective C-wave
> run of a normal ABC upside correction or a bear rally or a bear flag
> as most traders call it.
>
> Obviously, they are in a 1-2-3 Elliott Wave runs to the upside and
> will need 3 to 5 months of 4-th wave correction before they can execute
> the 5-th wave rally to complete the 1-2-3-4-5 basic pattern.
>
> After that, they will need bigger, longer and perhaps deeper corrections
> that should not break the bottom lows in order to sustain further
> rallies into the years/decades ahead. You may call it resting or
> healing process or base building or a selloff or even a meltdown;
> TAs called them pullbacks or corrections. Necessary ingriedient
> toward building supports to sustain further rallies.
>
> It takes time and time is the essence in such a dibilitating circumstance
> that should have bankcrupted them immediately.
>
> So unless any or all of them cannot heal themselves and build enough
> bases in order to become profitable into the years and decades ahead;
> they have the necessary volume supports right here at this tentative
> bottom just by looking at their monthly charts.
Japan collapsed in the 1991 realty bust, which on the surface seems similar to our current path, but it's not. In Japan, unlike here, there's a long history of cross-ownership of shares by corporations, including banks. This was all fine, when the various share prices were expanding, but caused havoc during the market decline. Further, because the values of many assets on their banks' books are merely the ownership of other similar interests, there's less underlying hard assets to support the values or lead a resurgence in value. This is very different from the structure of our banking system.
Secondly, the Japanese have a long history of conservatism, both societal and governmental, so they have been loathe to engage in any meanigful simulus efforts and have relied on the economy picking itself up by its own boot straps, so to speak, hoping that would occur by keeping interest rates near zero. Obviously, this has not inspired Japanese commerce.
Additionally, the Japanese people are not consumption oriented and have the highest savings rate in the world, further reducing monetary velocity. This is about as diametrically opposite the American mentality as it gets.
Lastly, in the last 20 years, Japan's bread and butter, the engine of its growth, the export business, has had its lunch eaten by Korea and China. This, more than anything, explains Japan's economic and market woes. The indigenous population is too small and too conservative-minded to drive interal growth on a massive scale, so by failing to remain competitve in exports, Japan has suffered incalculable damage.
Interestingly, as I type this, Japan's ruling party for almost the entire post-war period has suffered a crushing defeat at the polls and will be repaced with a very liberal party that will likely try to emulate the more socialistic and government-spending policies of the U.S. and ther European countries. It will be interesting to see how this works in Japan and how their stock market reacts to this election result.
In summation, forget comparing the U.S. market, economy or banking system to Japan; they could not be more different historically, structurally or in mentality.
On Aug 29 06:06 PM Nathaniel C wrote:
> It seems the only argument that the bulls have is that the FED will
> inflate the economy and that the stock market will simply go up becasue
> of dollar depreciation. This overly simplistic argument is flawed.
>
>
> QE has never worked during debt deflation. Look at Japan, they printed
> money and it did not work. According to the taylor rule they should
> theoretically be printing 10 trillion to avoid debt deflation.<br/>
>
> Also the bulls place to much faith in Bernanke. The same person who
> said their was no housing bubble, subprime was contained, fundamentals
> of the economy are sound, etc. Now he says the crisis is over and
> the economy is recovering. Who can believe a person with such a bad
> track record?This guy needs to go back to school to better undertand
> economics.
>
> Finally, remember that the FED and the government cannot decree economic
> growth or prosperity.
On Aug 29 06:34 AM rick12345 wrote:
> LOL... Another clown who thinks equity markets will fall back to
> March levels..
> I hope you all read the following article on the various idiots who
> tried to short sell AIG and had their fingers burned. If not, heres
> a link for you
> www.bloomberg.com/apps...;sid=avo4UmCFM2v8
Bravo to you, sir. The doomers/gloomers try to convince us that the market is filled with exhuberance and mindless investing, like early 2000. However, a quick look at newspapers, internet sites (like this one), will tell you that negative sentiment seems to outnumber positive by at least a 10-1 ratio (my informal research). I'm betting that, of course with some bumps along the way, this market will rise for the next two years.
On Aug 29 01:51 PM ari5000 wrote:
> Everyone's been calling the top for the last 3 months.
>
> Instead of wondering -- why is the market still going up?
>
> There's something new taking place. The Government has essentially
> made an ALL IN bet by stimulating. The govt. has now replaced all
> spending by the private sector and consumers in an attempt to keep
> the economy alive. The financial sector only thrives if the economy
> outside Wall Street thrives. By backstopping the banks, the Fed
> is trying to have the tail wag the dog -- stimulate the banks and
> hopefully, somehow, the financial dealings will stimulate the greater
> economy.
>
> I believe this is why the zombie banks are now leading the pack --
> it's an attempt by the Fed to up-end the nature of the business cycle.
> It makes perfect sense as a government drowning in debt and creating
> more each day -- absolutely NEEDS a growing economy... even if that
> growth comes by simply through inflation.
>
> Predictions of a 1000 point drop are almost ridiculous at this point.
> It shows a total lack of understanding of how a bankrupt entity like
> AIG could rise 100% in the first place. The Fed cannot stop what
> it has started. If the stimulus package fails, they will start a
> new one... TARP, TALF, cash for clunkers, housing credits... I've
> left out a dozen more. A crash? How? The Fed can spend more money
> than the entire world. What could possibly cause a crash when the
> Fed can spend infinite $$ ?? The Fed has supreme power now. Nobody
> can stop them. The taxpayers have no voice. Congress work for the
> corporations that benefit from Ponzi spending.
>
> The Fed has spent an is backstopping bets that probably equal a few
> hundred grand per citizen. All traders need to maximize their share
> of the takings. 90% of the trillions spent will go to a small percentage
> of insiders. We are living in a country that no longer has a rational
> government. The stock market, with zombie banks leading, clearly
> reflects the new mentality.
>
> I feel sorry for those who 'cashed out' or are sitting in gold (which
> the FCBs control an will never let rise) -- they are missing the
> greatest giveaway this generation will ever see. And I really doubt
> this is going to end any time soon.
>
> I can only dream of the next round of programs to come. But I will
> stay fully invested to capture as much upside as I can.
It's like a gambler who just lost his whole paycheck, so he hocked his watch and is heading back to the table where he just lost for one last all in.
On Aug 31 12:28 AM Bill L. wrote:
> *sorry I meant 30% of the volume in the NYSE - (Citi, AIG, CIT Group
> etc)