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Macro and Trading Rules-Risk Remains Off

 Sequel to our Aug 11 post on "End of Summer Rally"

If you hedged or exited stock positions on August 11 or  a couple of days earlier you would have saved 5% and much more on tech and smaller cap stocks.Since John Chambers of Cisco came on with his cautionary statements on August 11 the stock is down over 15%. Ditto for Intel at its YTD low of $18.18. All of the seasonal investing cliches are working: sell in May and go away, sell the summer rally and beware of September and October. To make matters worse individual stocks with good news cannot fight the overall bearish mood of the market and the economy. If jobs are down stocks are down.If the S&P is down all sectors are down. Fundamental analysis of stocks is of little  use in this market. Macro trends and trading rule. Deflation concerns paralyzes investors. Here are some points to ponder:

  • A trading mentality permeates the market. Abaxis (ABAX) was $21.18 on Aug 11 after announcing good earnings and is now at $18.2. MicroCap SeraCare (SRLS) is down 40% from June highs after volume dried up.
  • For the past 17 weeks there have been  mutual fund outflows to cash and bonds.Preservation of capital and yield dominate investing. Treasury 10 year yields hit a new low at the 2.50% level.
  • There is a weekly obsession with new data: jobs, housing, GDP, double dip, bond bubble. Bernanke and the FED. We escaped depression 18 months ago so shouldn't 1.5% growth be expected? Good corporate earnings are ignored due to bearish expectations.
  • M&A usually sparks rallies but now the translation is.. "they must know revenue growth is slowing and need a product boost".
  • Blue chips yield 3-5% better than 30 year treasuries but there is concern that taxes on dividends will be increasing way north of 20% from the current 15%. And we have learned dividends are no guarantee.
  • Theme and macro trades abound: e.g. buy gold and silver, hedge with ETF's, buy volatility, short the CPI, sell covered calls, buy potash, buy wheat etc.
  • Technical trading dominates fundamental analysis.

The next big call might be the mood shift out of deflation with the money flowing out of  low yielding bonds as investors  accept the "new normal" of slow growth. Then they would see equities as better value than bonds.Or technical traders will see the trading channel holding and spark a fourth quarter rally. But for now the "gloom and doomers" hold the upper hand.



Disclosure: none