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  • Dow 10,000 Under Attack. Again
    It seems silly, doesn't it? But whatever the reason, the market has decided to stake the 10,000 level on the Dow Jones as a place to pit it's next great battle. Will the area hold as resistance, now having failed as support? And what difference does it make anyway. The market has been bouncing around this key level for over a decade, so I doubt that whatever happens will be anything special this time. 
    All that said, retail investors are abandoning stocks, the economy appears to be in trouble, investor sentiment has taken a dive into the potty and best of all, a confluence of technical indicators point lower - maybe far lower - for equities pricing. It seems to be shaping up to be a very unpleasant September and October this year. Or it sure feels that way.
    The hope, of course, it that the market shakes out whatever is left of the weakened bullish hand, and does so quickly. If so, the last quarter of the year could present a potentially compelling entry point to equities.
    At the moment, I am still maintaining yield assets predominantly in my model portfolio - preferred, bonds, MLP funds, BDC interests, and a very, very scant allocation to equities. Overall, 40% of the portfolio will remain in low risk bonds and cash, with 50% into riskier yield assets. Only 10% is deployed into equity, although that allocation should be increased dramatically pending a possible September meltdown. Already, I am staking out solid companies with strong dividends, and ETFs that are based on companies with ten to twenty year histories of consistent dividend increases. Should we see the Dow fall towards 5,000 or lower, it could mark the once-in-a-generation entry point that has been long overdue these past thirty years. Similarly, if equities can hold above water in the face of these strong headwinds, it could also mark a reasonable entry point to up the equity allocation and reduce the bond and cash portion of the portfolio. Indeed, after a decades long feast, the party in the bond market is surely nearing its end, which could leave equities as the best play in town. The main question vis-a-vis equities is, in my mind, tactical rather than strategic. That is, while sharp declines appear probable in the near term, the ten year outlook for equities, relative to bonds at least, appears highly favorable. But as with most things in life, there is no difference between what an idiot and a genius does - the only difference is WHEN they do it.
    Aug 26 4:18 PM | Link | Comment!
  • More Gloom and Gnashing of Teeth

    After a nearly 300 point tumble today on the Dow, the articles and posts I read today seem fairly unanimous that this is the start of the big collapse, the one that will sink the stock market and, potentially, the United States itself. The pessimism borders on maniacal despair - perhaps not surprising after a wretched decade characterized by one crisis morphing into the next. I also read that retail investors are liquidating stock and hoarding up cash in droves, suggesting that we have possibly reached a point when an entire generation of investors throws in the towel and walk away. If so, that would normally mark the end of a secular bear market, which is what we've been in for the last decade. It is reason for optimism. 

    But that optimism may come too early. Markets can certainly decline further, and are nowhere near the valuation extremes of the late 1970s or early 1930s. Not that they need to be, but the point is that lower can get lower yet. 

    Technically, at least, markets held it together more or less at their 200 day exponential moving averages, although they sliced through their 200 day moving averages like a hot knife through butter. The MACD is now negative, signaling further downward momentum is possible. With technical signs ambiguous, it seems a very treacherous time to try and navigate the markets. More clarity may come if and when the 50 day exponential moving average drops below the 200 day exponential moving average, and when the 20 week simple moving average and exponential moving average drop below their 40 week counterparts.

    Technical analysis is not always accurate, but has been over the past decade. It may be worth assuming it will continue to be, until it isn't. Particularly if you believe that possibly, the maniacs are correct this time, and the United States is on the brink of collapse. Walking around the street at lunch time, though, it doesn't feel that way, but sitting in front of CNBC, it sure does.

    Aug 11 4:38 PM | Link | Comment!
  • The Market's Longer-Term Technical Posture

    The equities markets remain in a sour haze of befuddled technical cross currents. Much of the confusion surrounding the technical posture of the markets stems from differences in the simple moving averages verses the exponential moving averages. Take the S&P 500 SPDRs ETF (ticker SPY). There, we saw the 50 day simple moving average plunge below the 200 day simple moving average back in early July. Traders typically refer to this bearish chart pattern as a "death cross" and take it as a harbinger of further declines in equity prices. True to form, the markets rallied steadily since then - which is not at all uncommon at the front end of a protracted bear market. As of this writing, SPY has collapsed, once again, below it's 200 day simple moving average, a sign that this area is not holding up as trading support. Which opens the door to a bleak possibility: the 200 day simple moving average could be trading resistance - something that could force markets lower for the longer term.

    The story is radically different if you look at the 50 day and 200 day exponential moving averages. Here, we see that the 50 day nearly converged with the 200 day back in mid July, but since then has vaulted higher along with the markets' recent improvement. No death cross pattern there. In fact, it almost appears as if the bears took their best shot and missed - something bullish traders take as sign pointing to a possible capitulation on the part of bears. At the moment, SPY has fallen down to its 50 day exponential moving average, which at this moment is holding as support. Another bullish signal.

    So who is right? Bulls or bears? On the bearish side of the debate, it is clear that the Federal Reserve is somewhat petrified by the prospects for dim economic growth - or worse. So bad that they are engaging in a second round of quantitative easing. True, companies can be quite profitable during times of economic malaise, but we've already seen productivity gains dropping and the benefits of mass cost cutting pretty much hitting their max out levels. Corporate profits of late have been driven by cost cutting, and that party is probably about done. Slowing profit growth seldom accompanies a bull market... to say the least. Add to the mix the potential for a massive fiscal crisis, as interest payments on US debt threaten to comprise over 40% of US tax revenue should investor demand for US Treasuries falter. The system is awash with freshly printed dollars, proving ample fuel for a run on the buck. And let's not ignore the sickening Chinese, Japanese and European economies, either, or the recently ebullient emerging markets that depend entirely on these developed economies for export growth.

    On the bullish side of the debate, everything I have written above is so familiar as to be commonplace. Investors as a group seem to accept as gospel that doom, misery and despair are inevitable in the near term. Permabears have become the rock stars of 2010. But we know that seldom does the equity market accommodate the view of the majority, and bearish commentary has basically flooded the internet and airwaves. Second, the last round of quantitative easing worked wonders for the equities markets. Trading desks flush with newly minted cash dumped the stuff into risky assets, as assets perceived as relatively low risk offered yields as paltry as 4% or 3%.  Today, those low risk assets are offering returns of 2.7% and less.  Couldn't we see the same market reaction to quantitative easing this time around? What is different this time around? Is anything ever different this time around?

    Let's step back and ask what the Fed is really doing for a minute, buying up U.S. Treasuries and holding yields at implausibly low levels. I'd argue they are crowding out non-government investors, perhaps purposefully. You see, the Fed is perfectly content to earn a 2.7% yield, or even a 2% yield, or maybe even lower. A private investor, not so much. But the Federal Reserve is bigger than any private investor, and can do what they will with the price of Treasuries, effectively "out-bidding" private investors by driving yields down to levels that will become unacceptable, forcing private investors to park their money into riskier assets that offer juicier yields. If so, that would force equities prices higher. Betting otherwise is effectively betting against the Fed, and that is not an easy way to make money. 

      

     



    Disclosure: Disclosure: Author holds long positions in SPY
    Tags: SPY
    Aug 11 10:22 AM | Link | Comment!
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