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Inflection Point Investing LLC is a Registered Investment Advisory firm in New York City.
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  • 10 Reasons Why Equities Have Topped 0 comments
    Feb 10, 2010 8:55 AM | about stocks: AAPL, AMZN, GOOG, BIDU, ISRG, MSFT, INTC, STX, HAR, CPTS, UAUA, LFUS

    Given equities sharp advance on Tuesday and the fact that the intraday highs of January 19th to the lows of February 5th marked a neat 10% pullback, many pundits will now be pegging the recent market weakness as nothing more than a “healthy correction.” We feel that these so-called pundits are wrong and instead feel that the highs seen on January 15th were in fact the top for this mini-bull market cycle.

    We feel this way for the follow 10 reasons:

     

    ·         The lack of any sustainable progress on the employment picture in the U.S. will lead to a double-dip recession. The current recovery seems destined to fail with consumers tapped out and small businesses continuing to not receive the credit needed for new job growth.  With the U-6 number now showing unemployment at over 17% (see shadowstats.com), it seems only a question of when, not if, the economy rolls over once again. Equities have only just begun to discount the double-dip.

     

    ·         Tops and bottoms take time. As a market tops, it takes time for institutional distribution to be completed. Because institutions need months to work out of their long positions, expect heavy selling to occur near the 1090-1100 levels in the coming weeks. Ultimately, as sellers overtake all of the current “just a correction” buyers, these new buyers will then serve as the next band of sellers that will take the markets below their 200 Day SMA’s. Time is needed for this process to unfold, however; it does not happen in three weeks time.

     

    ·         While Tuesday’s volume did increase 10-15% over its recent average on the Nasdaq and NYSE, much of this higher turnover came from late-day sellers who knocked these respective indices almost 1% off of their highs. Downside volume has swamped upside volume in recent months. Expect this trend to continue for the foreseeable future.

     

    ·         Recent reports show the highest level of short interest in the Euro by hedge funds. While the short the Euro/long the Dollar trade seems overcrowded in the short-term and may be subject to near-term profit taking as PIGS bailout hopes gain steam, the dollar should continue strengthening in the coming months. Expect the dollar’s inverse relationship to commodities and U.S. equities to ultimately act as a bridge for lower levels in equities in the coming months.

     

    ·        Long-term trend lines have been broken worldwide. This is not just a U.S. phenomenon. Look at the charts on China, Hong Kong, Spain, and Germany to name a few. While these trend lines may be tested once more from below, expect them to serve as major bands of resistance that will not be overcome.

     

    ·        Apple, Amazon, and Google continue to languish. If this was a correction that had ended, wouldn’t all three of these “leaders” have broken back to the upside? Instead, all three were barely higher on Tuesday and cannot get back above their respective 50 day SMA’s.

     

    ·        Leadership is lacking. In a real bull-market, new leadership will manifest itself before the markets begin working higher. While it was nice to see UAUA, LFUS, HAR, CPTS make fresh 52-week highs yesterday, besides ISRG and BIDU, there does not appear to be any new institutional quality leadership ready to assert itself. This discouraging lack of leadership has been building for months now. A look at the 1-year history of 52-week highs on the Nasdaq chart below clearly shows that breadth has topped, a well-known technical ingredient for any major market top:




    ·         Typically, one of the defining characteristics for any secular bear market is the contraction in valuations. If the start to 2010 is any indication, this year may be remembered as the year where P/E’s once again started to shrink for equities. MSFT, INTC, STX all look like bargains right now and yet their stocks are languishing. Bottom fishers beware: in bear markets, cheap stocks get cheaper first, and then dirt cheap.  

     

    ·         Recently, the Mutual Fund Cash Ratio registered with an extremely low level of 4%. These low levels of cash point to buyer exhaustion and are levels that are consistent with previous market tops. We do not expect this time to be any different.

     

    ·         As markets bottomed early last year, insider buying swamped insider selling. For now, insider selling continues to overwhelm insider buying, continuing a trend seen for many months. According to SEC filings monitored on www.insider-monitor.com, yesterday corporate insiders sold 3-4X more stock than was bought. This is not the type of insider activity that is typically seen at market bottoms.

     

    After turning bullish last Spring and remaining aggressively long during 2009, we have turned bearish at current levels due to all of the aforementioned reasons. We expect this current rally on the S&P 500 to fail as prices move up to 1090-1100 in the next 1-2 weeks.  As such, we recommend selling into upcoming rallies and to position portfolios for what should turn out to be an arduous 2010.

     



    Disclosure: Long 5 BIDU Feb 370 puts that are sure to go worthless today.
    Themes: PIGS Stocks: AAPL, AMZN, GOOG, BIDU, ISRG, MSFT, INTC, STX, HAR, CPTS, UAUA, LFUS
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