Dominic: So do you know what's gonna happen?
Finch: No, it was a feeling. But I can guess.
-V for Vendetta
Despite my bearish bent, I am not a big believer in predicting crashes. Yes, they happen, but by definition they are also a rarity. That being said gloom and doom is a lucrative business for those that can successfully carve out a niche ala Zerohedge or Roubini. Internet traffic, speaking engagements, consulting fees, and books are all ways of monetizing the model without ever having to deploy capital. If you are trading or actively managing investor money in markets being bearish is a different ballgame.
Short selling is usually a high stress proposition, and making money finding the needle shorts in the bull haystack sometimes feels like mission impossible. So, when I say I cannot recall the last time shorting was this easy, you should probably pay attention. Some very interesting things have started to happen in markets, and they are very bad indicators for anyone that is long. Basically, shorting growth momentum stocks has become like shooting fish in a barrel. If they disappoint, they implode. If they beat big, they pop a fraction of what they used to pop, and then start giving back those gains rather quickly. And anything inline is starting to be faded. And of course, the ultimate indicator, large after hour reversals are happening. This is something that always occurs at a major turn. Consider names like NFLX, GMCR, FSLR, etc. Last fall these stocks reported major disaster quarters on the back of several disappointments. Yet what happened is the initial knee jerk sell-off after hours started to reverse, and buy the next day many of these stocks would be green. Then a week later they are up 20-30%. That was the beginning of the buy the heavily shorted stock momo strategy, and the ultimate sign of selling exhaustion. Now consider what has happened over the past two weeks.
VMW- Reported Monday night, beat big, up 10% next day, by Friday flat.
NFLX- Reported Monday night, up 6% during day, inline rev/strong sub guidance, 10% ah, reversed completely following day, closed down 10%.
AKAM- Huge headline beat, up 10% ah, reversed was down 10% by end of session
FFIV- Big headline beat, up as much as 11% ah, reversed closed week down 8%
NOW- huge bookings number, up 8% next day(this would have been a 20% pop 3 months ago), down 3.5% following day
ARMH- solid earnings, down 3% first day after, 7% the next day.
Fiber Optic Space- whole sector sold off
JNPR- beat, finished week down 10%
TRIP- inline quarter but solid guidance, popped, reversed, went nowhere on the week
N- beat, up 2% next morning, closed down 5%
MKTO- 65% YR/YR rev growth, beat top line consensus by 10% as well as a bottom line beat, jumped 12% after hours, opened up 10%, finished up 1% and unchanged for the week
INFA- Strong q4 guidance, up 6.5% ah, up 9.5% at one point in early trading next day, closed day down 4%
YNDX-Beat across the board, guided to high end of range, 38% rev growth, traded up a bit, opened flat, closed down 6.5%
INFN- Beat, guided in line, fell 10%
UA- Beat big, flawless report, finished week down 7%
EQIX- Not exactly having a great year, but still a good growth proxy. Beat, Guided higher, trade up 7.5%, tested flat, finished week up a 1%.
ZNGA- Beat, mixed guidance, new coo,soared 19% ah, closed up 5.5% in regular session, finished week flat.
If you think this is normal action you have not had enough market exposure in your life. I've seen this type of activity only a handful of times over the last fifteen years.
And these were the good news stocks....
The bad news guys got creamed.(see FIO, SYMC, SYNA, QLIK, TQNT..for an idea of how that went)
Meanwhile the overall market trekked higher on the back of defense, basic materials, miners, and mega cap tech stocks like GOOG, AMZN, and MSFT.
This is what you call a major negative divergence. Buying has become exhausted.
The market is going up yet all the momentum that has led is starting to roll over, and the outcomes are all favoring aggressive bearish positioning. It's in times like these that you can buy puts post volatility collapse, and make insane returns as major reversals start to take place. Basically, we are at the polar opposite of where we where a year ago.
Now, pay close attention here.
This window is usually very small. Traders react very quickly to this type of price action, and market internal changes. This will spread like a virus. What follows is INDISCRIMINATE SELLING.
Now, here is where things get really interesting.
The fed meets this week and expectations are for them to stand pat. The economic data would seem to support this, but I am not sure that will be the case. Big Ben has two meetings left before he exits office. Conventional wisdom would dictate that you wouldn't want to make a major move at your last meeting. Thus, if Ben is going to taper at all this would be the week for the move.
But why move at all, when you can simply punt to the next fed chair?
The answer to this question has little to do with economic data, and everything to do with personal legacy. If Bernanke does not taper before he leaves office, any ensuing market issues will not be blamed on the next fed chair. That person will always be able to say, "hey, I am simply reversing what was done, don't blame me for the impact." But if he does taper, then big Ben can always say that I saved the economy and set the fed on a path to normalization on my way out the door. Ensuing issues can always be blamed on the failure to respond accordingly. Unwinding too fast, not pausing when needed, etc.
So, my guess is Ben knows a surprise would lead to a swift ten percent correction, and that things would bounce around from there. If he sparks this move, he can for years to come say he made the move more for cooling off equity markets than anything else. He will also be able to argue, rather convincingly I might add, that he weighed the actual economic impact as negligible. It's the safe play for an academic, and definitely the right strategic move legacy wise.
That being said, I don't think Ben needs to move for a sell-off to begin. The markets are already flashing the classic warning signs which end up obliterating retail momentum chasers. A taper would simply provide the headline excuse for what already has begun. So, to put it bluntly, if you are looking for one hell of a short-selling opportunity.
HERE IT IS!