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Wall Street Strategies has been providing independent stock market research since 1991 to individual, retail and institutional clients through a balanced approach to investing and trading. Charles Payne, our founder and chief analyst, is routinely sought after for his stock market, political,... More
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  • PLOP, PLOP, FIZZ, FIZZ - By Charles Payne 0 comments
    Apr 7, 2014 10:25 AM

    The sell-off of high-flying momentum stocks that began a few weeks ago, like the proverbial snowball that became a boulder by last Friday, is taking a massive toll on names that had been virtually unstopped. In the grand scheme of things, most of the biggest losers were overdue to give back some gains. Either they were up beyond the boundaries of imagination, or they have been on automatic pilot for so long that losing altitude was inevitable.

    Market watchers often talk about how healthy pullbacks, and even corrections can be for the stock market over a long-term, but digesting gains this fast doesn't make most people feel better. If we were treating heartburn, speed would be nice in that case; the pace of this selling is creating, an even greater heartburn.
    What is interesting is that there is not a great sense of panic per se. In fact, many investors have been bracing for this for a while. I have only gotten a few distressing emails, which comes with the territory, even as we have taken a ton of profits last month, and have asked subscribers to hike their cash position to as much as 30%. This is the point where I like to remind investors that I regret 85%, or more of all the sells ever made in the stock market, and more than 90% of sells are based on emotions, even when our modeling work and common sense suggest holding, and even buying.

    This is the End

    For a couple of years, predicting the end has been a cottage industry from the Mayan calendar, to the legend of Ragnarok, (Doom of the gods) that states Odin was to be killed February 22, 2014, by the wolf Fenrir.
    The old Norse legend has taken on more significance as foretold that it would precede by the "winter of winters." Calling for the end and fear mongering are not new, just more profitable.

    In fact, the rally has lasted so long, it's not just book-sellers, foes of the Fed, natural curmudgeons, and traders that would make a mint on increased action, (especially on the downside), but politicians are getting in on the act as well.

    Setting up the Blame Game

    Rep. Barbara Lee

    While promoting HR 1579:

    In recent weeks, investigations of high -speed trading on financial markets have underscored the negative effects these trades have on the U.S. economy. The Wall Street Journal reported in March that high -speed trading programs "can encourage traders to engage in strategies that boost volumes, but harm other investors."

    High- speed trades are also linked to price rises in gas, food, and other essentials.

    Rep. Keith Ellison of Minnesota remarked on Friday, that the stock market is on the cusp of a major crash, triggered by high-frequency trading, as he pushed for his Inclusive Prosperity Act that would tax each market transaction of $100 by $0.50. The tax would apply to individuals with incomes of $75,000+ and aim to raise $300 billion annually.

    How ironic in blaming high-frequency trading to justify a tax on investment transactions, which would cost substantially more than anything imaginable from the practice. However, make no mistake as I suspected from the very beginning that the 'Lewis book' and subsequent actions, including the US Attorney General considering whether HFT is the same as insider trading.

    Insider Trading (SEC.gov)

    "Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders-officers, directors, and employees-buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. For more information about this type of insider trading and the reports, insiders must file, please read "Forms 3, 4, 5" in our Fast Answers databank.

    Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

    Examples of insider trading cases that have been brought by the SEC are cases against the following:
     

    • Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments;
    • Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information;
    • Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
    • Government employees who learned of such information because of their employment by the government; and
    • Other persons who misappropriated, and took advantage of, confidential information from their employers.


    Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.

    Wolves at the Door

    Before Odin is to face his fate during Ragnarok, a wolf named Skoll will devour the sun, and another wolf named Hati will devour the moon. Once these events occur, the stars will disappear from the skies, huge earthquakes will erupt around the world, and the landmass will sink into the seas. Often I feel this is actually happening right now, although Norse gods are not the targets but rather a way of life and an economic system that created the most generous country ever.
    A nation so comfortable with its wealth and success that it can ponder changing it all: wolves are attempting to devour it all. One is gnawing at the Constitution, another is barking at free market capitalism, and yet several are circling belief in God, all moving in for the kill. Each snowstorm, dry spell, and a story of poverty is a weapon. Once Odin has been devoured, and the earth sinks into the ocean, a new would emerge as a magnificent utopia, with endless supplies to take care of all the needs of mankind.

    The Market From Here

    Trying to predict when the panic stops is difficult. For the most part, most of the money that has come out of hot stocks has found a home in blue chip names; but selling begets selling, and Friday all industries and sectors (save utilities) got pushed around. Still, last week saw the Dow and S&P 500 reach new all-time highs and I think bias continues to the upside, unless the NASDAQ meltdown continues. The way I see the crash is different from the daily calls for the end.

    Despite the surge in the market, we have not had that blind enthusiasm that sees dips last minutes, and all those new IPOs opening up more than 100%. Moreover, I want to see the Great Bond Rotation, which has not happened.

    Mutual Fund Flow(ICI.com)2/26/20143/5/20143/12/20143/19/20143/26/2014
    Total Equity5,0185,3914,227-9621,234
    Domestic3,1651,9461,908-3,804-267
    World1,8543,4452,3182,8421,501
    Hybrid1,6401,1101,9391,822966
    Total Bond2,3543,7905,3032,4811,275
    Taxable1,6953,0354,7422,2441,227
    Municipal65975656123749
    Total9,01210,29111,4693,3413,476

    In fact, recently there has been money flowing into bonds, while investors dump domestic mutual funds. I have written about QE, which is not the same as zero-percent interest rates. Early tapering did not stop stocks from moving higher.

    We may see some technical challenges to the market if emotions do not head off by the upcoming earnings season, where there will be many misses, but where guidance could positively surprise.

    Conclusion

    I happen to like it when the market comes down hard and fast, even though the risks include widespread panic and massive fear. Moreover, valuations do not ever hit the right spot on the downside as they become over depressed on the upside, and they can get wildly overvalued. This is going to be a critical week as the latter might have happened with a few selected names; however, could their correction mean that all names become the former?

    Themes: The Market
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