What do we know:
- We are still in a trade war and have a temporary suspension that's set to expire.
- Longest government shutdown in history. Still not officially over, will carry negative GDP and economic impacts. Unfortunately, these impacts are being largely ignored.
- A fed who has one foot on the ground and one in the clouds and seems to be a hostage to the markets and critics.
- Brexit concerns which are real, along with other geopolitical issues.
- A White House with a high turnover, a President with advisors being arrested and sentenced to prison, and impeachment whispers underway.
- Analysts setting the earnings bar so low that a toddler could jump over it. Earnings are bad for this quarter but for some reason the market is rallying.
- Revised lower guidance from not just analysts, but all the largest companies in the world, with stern warnings on issues in China. Further reiterated in Davos earlier last week by most market experts.
- Companies are using troublesome accounting tactics to back their way into consensus and earnings. Carl Icahn spoke out in great detail regarding this issue.
- Highly problematic corporate buybacks and suspect financial engineering.
- Corporate debt highest in US history.
- Consumer debt highest in US history.
- Student loan debt highest in US history.
- Unprecedented amount of chart pattern reversals that violate technical analysis.
- Breadbasket ETF's that include really bad companies that were represented and owned by the firms that created the ETF's. A blatant and classic pump and dump scheme but somehow regulators haven't investigated. Just a modern day version of a CDO.
- Quantitative easing is over and interest rate increases have negative effects on corporate investing and consumer spending. That alone would justify a 6% pullback from the all-time market highs.
- Consumer sentiment recently reported at lows not seen since before Trump's presidency.
- Real estate numbers are awful, softening both residential and commercial prices creating a loss of wealth for US consumers that carries a negative impact on the wealth effect that will unfold into other areas of the economy.
- Housing sentiment has double digit year over year declines.
- Mortgage applications over 16% lower from a year earlier
- Richest man in the world (AMZN), running one of the top three companies in the world, is going through divorce and losing half his wealth and stake in his company, and no one is even reflecting that in the stock price, but rather it has rallied.
- Oil markets are piling up surpluses again and by hook or crook the group is moving higher.
All of these indicators prove that this is unsustainable and that a fragile set of circumstances are propping up the stock market.
One might go as far as to conclude that there is a cloud and black hand over the market that is moving it in a self serving and possibly fraudulent manner that disregards balanced common sense. It's distressing to see news commentators and analysts not standing by their original assessments, or they have the short-term memory symbolic of a goldfish.
In the not too distant past, most professionals and analysts widely touted that the markets were overstretched in terms of valuations (after, not before, the correction of course). This consensus came at a time where the market experienced peak earnings and gained extra boost with the assistance of a tax reform.
As of January 31, 2019 we are within 6% of all-time market highs and it comes without additional assistance of tax reform and profound earnings. Overstretched valuations are no longer being spoke of but rather the new commentary and general agreement is that the market is undervalued? It's a fair depiction of DC Comic's Bizarro World as it relates to the stock market and gives the perception that the present markets are being influenced and steered.
In my professional experience, it's the large trading desks and institutions that are always the last to the party because they can't move as fast, and are the last ones to leave after they pig out. The recent price action would signal that they are switching their positions and making the markets before they will allow the market to continue to its next leg lower.
What's more mixed up is that the large institutions and trading desks, which I won't name to avoid legal backlash, decided to write excess short-term put options when it was realized that the options market was favoring very short term forecasting. They then decided to sell them, and are artificially keeping the underlying asset propped up until option expiration, which for many, was today, January 31. The unique thing is that in several cases the large trading desks are using commissioned corporate buybacks to repurchase shares to keep these prices above put option strike points. Guess we'll call it a nice sweetener for all their troubles....
Mainstream charts patterns that have been proven throughout history and are considered religion by some, are being busted at unprecedented levels. As a chart technician, I have never seen so many short term technical trends reversed in the same amount of time across so many industries. Your classic double pipe tops on daily and weekly charts are being busted and reversed and stocks are going higher. The reversal percentage or "busts" on these charts are roughly 18% and this is happening across multiple industries on over 66% of chart cases I've reviewed over the past several days. Your classic adam and adam charts, and adam and eve charts are experiencing the same and in uncharacteristic sharp moves upward.
Having stocks rebound 50-60% in just four short weeks is not only unsustainable, but reckless, and not investing but rather gambling. Having stocks like Match.com (MTCH) rally 63.5%, Netflix 55.4% (NFLX), Square (SQ) 57% (before the pullback two days ago), or (LABD) down 60.14% in the same four weeks which serves as an oscillator for market increases. Meanwhile Gold is going up at the same time as the market and is no longer correlating the way it always has, which means one will have to give up ground starting tomorrow.
Warren Buffett (BRK), arguably the greatest investor of all times has still not put capital to work and has record amounts of cash on the sidelines even after our move into correction and bear market. Wouldn't this be a clear indicator that the worst is yet to come? Buffett often touts that he would buy more Apple if he could at cheaper valuations. I say we give him the opportunity. I'll depict this more in my next article, Apple: Friend or Fraud (AAPL).
In closing, I don't write much commentary, but felt like my opinions needed to be expressed. I've been in the unique position to profit significantly off the anticipated moves that I have described which left me with a gain of 177.4% for 2018 against the S&P's loss of 6%. This came not from stocks with elevated implied volatility, but rather developing new trading techniques from an organic standpoint.
The emphasis of this article is to educate readers and encourage them to exercise caution when engaging in a market that can no longer be traded off of fundamentals and even more recently without chart patterns, technicals, and movement. That leaves nothing left to trade off of except for sentiment and waking up each morning to smell the bouquet and determine which hybrid and percentage distribution of the earlier mentioned techniques will be the best option. Trade safe my friends!
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in AMZN, AAPL, MTCH, SQ, BRK.B over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.