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Navarro's Market Rap: Davio is Much More Interesting This Week
We've got the flatsies in a market where there is enough uncertainty as to make me market neutral. My version of that is to be short QQQQ and long a few positions -- ASTM and my last week's pick TWP (which had a very nice week, thank you very much). (I pulled the plug on DHB on some negative executive team news and took a nice little gain on AMKR.)
My suggestion for this week is to read Davio carefully and check out several of his charts of the week (on the Chart of the Week Link page).
One chart shows that inflation is likely being understated by the gremlins in the bureaucracy that changed how to calculate inflation -- ergo the push on gold and the continued insistence of central banks around the globe to push up interest rates.
A second chart compares 2000 to now and suggests that manias come in pairs.
Keep your powder dry and your assets liquid.
P.S. The big market mover this week could be the CPI. It's all about the core now. Substantially above 2%, and the market tanks and conversely.
Week of December 5, 2005
Navarro's Market Rap: Pulling the Plug
Last week, I called for a continuation of the current Xmas rally but warned that possible bad or mixed news on the Black Friday/Monday front might put a crimp in your bullish plans. Sure enough, the news was less than stellar. While the NASDAQ managed to eke out a small gain, the S&P 500 fell.
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After giving some of my fat November gains back, I decided to pull the plug early on this rally (see Peter's Portfolio below). I'd rather sit on the sidelines with a few positions that ruin a good year. My thinking goes along the following lines:
Yes, the economic news remains good. ISM looked great. New home sales looked great. GDP burst over 4% to 4.3. And oil prices are falling. The problem with all of this is that the news is so good, it is unlikely to deter the Fed from continued rate hikes. So there is a dangerous game of chicken being played between the data and the doyens at the Fed. If the Fed wins, we all lose….
Peter's Portfolio: Shorts and Longs
I pulled the plug on ARDI, DSS, SVA, LVLT, GIGM, AIRN, QQQQ, and VISG. All were money winners showing strong technical deterioration. I'll
put 'em on a watch list and maybe buy-em back, but for now, it's adios.
I'm holding ASTM and AMKR. I went short QQQQ with some trepitdation. I added a ceramic armor play DHB on strong technicals. I added TWP on a "Peter Lynch" type of play: A friend of mine raves about the product this company makes – a composite flooring that blends wood and plastic that is used in outside decking. Technicals look good. This stock is at $23 off a year low of $18.77 and miles from a year high of $54. Let's see if it knows how to run. Finally, CPTCQ.OB shed its "Q" and, out of bankruptcy, took a nice little 10 cent sprint as CPTC. I'm hanging on to my semi-big position….Now if they can only dump the CEO and put it some new management to take this company to the next level….
The Week Ahead: Home Game
Let's see if productivity can hold on to its 4% rate or whether a downward revision might stir inflation fears on Tuesday. Other than the ISM service index on Monday and the U Mich sentiment numbers on Friday, it's a light week. That's not good for a market where bullish sentiment is high and needs a goose from the data to reach the next level.
Hedging Your Bets With Matt
Davio: The Investor Base Becomes Momentum-Driven
Valuation is rarely a sufficient reason to be long or short the market. Absurdity is like infinity. Twice infinity is still infinity. Twice absurd is still absurd. Absurd valuations, whether high or low, can become even more absurd if the expectations of market participants become momentum-based. Momentum investors do not care about valuation; they buy what is going up, and sell what is going down.
You'll know a market top is probably coming when:
1 The shorts already have been killed. You don't hear about them anymore. There is general embarrassment over investments in short-only funds.
2 Long-only managers are getting butchered for conservatism. In early 2000, we saw many eminent value investors give up around the same time. Julian Robertson, George Vanderheiden, Robert Sanborn, Gary Brinson and Stanley Druckenmiller all stepped down shortly before the market top.
3 Valuation-sensitive investors who aren't total-return driven because of a need to justify fees to outside investors accumulate cash. Warren Buffett is an example of this. When Buffett said that he "didn't get tech," he did not mean that he didn't understand technology; he just couldn't understand how technology companies would earn returns on equity justifying the capital employed on a sustainable basis.
4 The recent past performance of growth managers tends to beat that of value managers. (I am using the terms growth and value in a classic sense here. Growth managers attempt to ascertain the future prospects of firms with little focus on valuation. Value managers attempt to calculate the value of a firm with less credit for future prospects.) In short, the future prospects of firms become the dominant means of setting market prices.
5 Momentum strategies are self-reinforcing due to an abundance of momentum investors. Once momentum strategies become dominant in a market, the market behaves differently. Actual price volatility increases. Trends tend to maintain themselves over longer periods. Selloffs tend to be short and sharp.
6 Markets driven by momentum favor inexperienced investors. My favorite way that this plays out is on CNBC. I gauge the age, experience and reasoning of the pundits. Near market tops, the pundits tend to be younger, newer and less rigorous. Experienced investors tend to have a greater regard for risk control, and believe in mean-reversion to a degree. Inexperienced investors tend to follow trends. They like to buy stocks that look like they are succeeding and sell those that look like they are failing.
7 Defined benefit pension plans tend to be net sellers of stock. This happens as they rebalance their funds to their target weights.
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