S&P Grudge Match: Cramer Vs. Gartman

Includes: SPY, VXX
by: Hedgephone


Gartman says buy the VIX.

Cramer says stocks are about to rally big time.

Which one (if either) is correct?

Now that the central bank equity markup road show of the past week is over, investors can forget about bazookas and start focusing on earnings growth. On that front, things aren't looking as awesome as most of the talking heads suggest - remember, a long only guy is always bullish. It's in his (or her) DNA. Over the long term, the most bullish are always right because of the greatness of America and also because of the stealth asset inflation caused by our current FIAT currency regime and our permanently dovish Fed.

Currency wars are bullish, but "they" can't stop fundamentals forever. So where are we headed over the next month? My crystal ball is in the shop right now, but like 2 PAC I know you are "still ballin." So let's hear from Cramer and Gartman and decide which one is right and we can put our limited hard earned money where the powers that be will have to pay us what it weighs:

Dennis Gartman is buying the VIX via iPath S&P 500 short term futures fund (NYSEARCA:VXX):

First off, I have to say buying S&P put options makes a lot more sense than any of the VIX derivative products. These funds tend to drop regardless of whether you are right or wrong on the underlying because they are poorly constructed products that simply bleed money over time because of leverage and frictional costs. Don't get me wrong, these funds are not constructed by stupid people, but the only long term holders of this style of investment vehicle, including the triple levered products, tend to be intellectually challenged on some level - why not learn about puts and calls yourself? VXX has a long, proven track record of going down over time, regardless of what the actual VIX does.

Second off, I happen to like the risk reward of buying put protection against existing longs better than just buying extremely overbought and overvalued stocks here at a 70 RSI after a vertical 12% rally - so let's give Gartman credit for at least getting the theme correct, if not the application. Currently, we're long the S&P 500 (NYSEARCA:SPY) $204 put options expiring on the 31st, expecting to lose the premium, but consider it to be insurance.

The trade is risky, and is an insurance policy against long positions. The trade makes sense if you have large capital gains issues and you want to reduce market risk or re-balance. I do expect further "ramp-job" manipulations in the future, but I don't expect a new bull market at these nosebleed valuations.

So in conclusion, we like the idea behind the trade, just not the vehicle he chooses - to us, VXX looks like a "hoopdy."

Cramer suggests that we are now out of the woods and it is finally time to buy. The only trouble is, that he was a little too bearish when we were at $1800 and he's bullish now that we are at $2050 - as Steve B. on Fast Money says, that's "investing in reverse." I kind of agree - where were you when it was time to buy? The same can certainly be asked of Gartman - he has been, well, wrong a lot lately. We will have to handicap that to some degree because no one can possibly be wrong 100% of the time.

Then again, Cramer is right quite often. He has turned into an optimist. The checklist he has used in the past has largely been marked off...

The main issues for the stock market are:

1. 5 consecutive quarters of negative earnings growth

2. Valuations: the S&P 500 trades for nearly all-time high historical valuations - the S&P trades for 1.8X sales, 23X GAAP earnings, and 25.5X peak earnings. While valuations don't matter in the short run, they almost always intersect with price at some point. A market median valuation from a historical perspective would mean a 30% correction.

3. Stocks are technically overbought with a near 70 RSI on most averages:

Also, one should note the large green volume bar this week. Increases in volume (spikes) often mark tops and bottoms. Next, note the Doji like candle and the trendline from the Nov/Dec highs to today's highs. The slow stochastic and MACD are also extremely overbought.

In conclusion, we feel both Cramer and Gartman will be proven wrong over a year's time. Gartman because VXX loses money over time no matter what the VIX does, and Cramer because you should not buy vertical 70 RSI 13% three week rallies under major resistance and at decade high valuations. Now is likely the time to sell/rebalance stocks, and to own some silver. Buy puts not VXX, and remember, no pundit ever gets things 100% correct.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.