Seeking Alpha
Long/short equity, medium-term horizon, hedge fund manager
Profile| Send Message|
( followers)  

Aug 21st - Market action continues to be constructive. Bulls have a firm grip and are not loosening it for now.

Monday was largely quiet in respect to the major indices, but market internals are improving. AAPL surpassing the milestone of "most valuable company of all time" (in nominal terms) also surely added to positive sentiment.

We spend less time looking at things like A/D lines and, through a combination of automated and human screening processes, digest the gestalt input of hundreds of charts each day (in addition to the few dozen bellwethers we track). The overall message continues to be, "bulls gaining traction." This does not speak to what may happen in September. But it speaks loudly to right now.

Giving a sense of tone and tenor, three notable breakouts on Monday:

(click to enlarge)

Silver has been threatening further decline via bearish weekly chart for months now, but is showing clear sign of resolving to the upside instead. Silver bulls, who held through a significantly challenging period, may have passed a psychological 'Soros test' of sorts in which their base of conviction now converts to confidence and further buying.

We are not long silver at moment, but will be watching for inflection points both in the metal and in select individual silver stocks. In the silver space, Couer D'Alene (NYSE:CDE) has already taken off but many other silver names are still just waking up from sluggish sleep and preparing to clear their bearish descending weekly channels.

Solar stocks have been a long-time whipping boy for bears, which creates substantial upside opportunity via short-covering alone. For example First Solar (NASDAQ:FSLR), one of the highest profile solar names, showed a recent short interest (via Wall Street Journal data) of nearly 49%!

In addition to major short interest build-up, solar stocks have been depressed by supply gut and a bearish outlook for crude oil. Both of those factors could now be shifting.

We have an established long position in TAN - all positions documented in the Mercenary Live Feed - and will be incrementally looking to add via individual names if the trend lasts. Regardless of whether this is a false trend, it is a false trend with potential staying power via the short positioning of bearish hedge funds who are more investors than traders. (The type to hold on to their shorts too long, 'fight the tape,' and then blow out at higher and higher levels of uptrend as their thesis, and P&L, gets eaten by price.)

Citigroup (NYSE:C), the bank that so many love to hate, is interesting in what its surge potentially has to say for the financials. Could blue skies for the financials finally be returning? A rise in long-term yields could actually be a POSITIVE for financials, if such indicates a return of risk appetite and an ability for banks to start lending again (thus making money in the classic 'borrow short / lend long' model that created financial institutions in the first place.)

In addition to the above, the euro is surging overnight (below circa 5 hours prior to NYSE open):

(click to enlarge)

The EURUSD breakout is technically significant and, if it holds, another significant positive driver for risk assets. Note that a sustained move above the 50, if it happens, would be the first one since March!

In the Live Feed we have a handful of select shorts, but are increasingly leaning towards pressing our "rented longs." Our bullish view does NOT extend out for multiple quarters, and may not last more than a few weeks - come pale September, much of the present positivity could quickly reverse. But we are traders, and being traders, we have the ability to respond to catalysts and inflection points as they arise.

(It is sometimes important to point out the distinction between a trading point of view and an investing point of view, as investors will sometimes wrongly assume that a trading perspective, with a max shelf-date of weeks or months, extends out longer than it does. When it comes to what will happen in the next three months, six months, twelve months etcetera, we remain resolutely agnostic.)

In addition to above mentioned areas of opportunity (silver, solar stocks where we already have a base position, possibly financials), we are increasingly drawn to energy stocks. While the current trends in energy and crude oil look moderately overbought, there are still many energy names with relatively low valuations and attractive technical patterns. Such names will call out to money managers who are 'not long enough' and looking for safe places to inject more cash into this rally.

And of course, if you want to see exactly what positions we are taking, how we are sizing them, handling risk etc., all is made transparent (and time-stamped) via our real money executions in the Live Feed.

NEWS FLOW

Consider the following socio-economic contrast:

AAPL just became the most valuable company of all time, in nominal terms, even as desperately poor Italians sell their gold teeth (literally, read the article) in the hopes of scraping up whatever cash they can.

A great historic theme is the growing divide between rich and poor. In the second half of the 20th century that gap was narrowed somewhat by the rise of a Western middle class. Now the gap is widening again furiously. Wall Street (and the majority of corporate earnings) is driven by the spending power of the top 30%, along with 'up and comers' (those not yet maxed out on debt) in developing world countries.

As for the dying middle class, and the large 70% or so majorities in the United States and Europe who are scraping to get by, feeling more and more pinched by 'austerity' programs, lack of employment, and rising food costs day by day… they simply don't matter. No one cares about them at all. The stock market certainly does not.

The markets will care, however, when the political dynamic turns explosive…

What the above represents is another major macro crisis in the making, on par with any of the predicted crises involving government debt, demographics, and so on. It is just a matter of when we reach a civil unrest tipping point, and or a political demagoguery acceleration point as the poor and disenfranchised realize they still possess a voting majority…

Anyone see the irony in Goldie telling clients to 'get out' of stocks even as the bullish internals look more favorable than they have in a long time?

Of course, any forecasts longer than inflection point short-term in this environment are just silly guesses. The talking head investment strategists who go on CNBC and talk about what they foresee in six months, twelve months and so on are just wasting everyone's time. There is flexible response to developments and opportunities as they unfold, and then there is hot air.

It will be interesting to watch bank lending levels. If we see those accelerate, then a rising inflation / higher yields recipe could really be locked in, which would have all sorts of interesting implications (not all of them purely bullish for markets).

On the other hand, if the long-term bond bulls are right - and they do exist, and are credible - then the current decline in USTs is only temporary, as is this short-term burst of economic optimism, and the worst (along with the lowest yields) is yet to come…

Die-hard China bulls, who have found every excuse to reiterate their optimistic stance over and over, in spite of the facts, have proven themselves the worst sort of cheerleaders. More long-only types who can't sell, because it would hurt whatever form of long-only product they are ideologically handcuffed to, and can't stop talking their biased book.

China is still a major risk factor for implosion. Temporary improvements in the China situation are not cause to think China has "bottomed," but instead potential bull traps in our view.

Good riddens to a god-awful flash in the pan business model that will look embarrassing from the perspective of history - yet another in the endless string of examples of over-enthusiastic investors swallowing hype and taking full leave of their senses.

CHART NOTES

  • No major changes for bellwether indices
  • Silver (NYSEARCA:SLV) powerful breakout
  • Solar stocks (NYSEARCA:TAN) bear-fueled uptrend underway
  • Financials (via C) looking strong
  • Healthcare (NYSEARCA:XLV) stalling?
  • Semis (NYSEARCA:SMH) losing steam?
  • Euro (EURUSD) looking to clear 50 EMA
  • Aussie dollar (AUDUSD) reversal of the reversal?

In final note, it may be little more than hunch but, after a slow summer, we are developing the sense that something 'big' is going to happen this fall. Someone is likely to make a lot of money (hopefully us) in the final four months of the year…

JS (jack@mercenarytrader.com)

Source: Global Macro Notes: Silver, Solar, Citigroup