Good News: This Market Looks Pretty Bad
Technical
This market looks pretty bad hopefully that is good news. Volatility as measured by the VIX closed at 16.22 Wednesday, which is a five month high. Around this level I would expect a bounce, however, the stock market's breath stinks and selling has been notably fierce. I am not going to rule out a turn around from here but stocks are more likely to see a dead cat bounce if the buyers come back too soon. For all the reasons I wrote about in my last post the projected fundamentals and ensuing technical characteristics of this market seem to be in sync. It is likely the stock market has more down side to go.
The S&P500 closed at 1178, the sixth day below its 200 day moving average. The longer the index stays below the long term trendline the greater the inertia to get above it again. As bad as the S&P500 has been it is not the real story. Small caps and nasdaq stocks have been hit harder. The nasdaq composite is down 9% from its August high with many high beta stocks dropping 15% or more. Former leaders from tech, energy and the homebuilding sectors have been hit the hardest, signaling a change is leadership is coming.
We continue to reduce positions and look for new opportunities. I am reluctant to short until it becomes technically feasible. By that I mean I want to see a bounce and evaluate the situation before we make the investment. The market is in the middle of correcting as the smart money positions itself for the new market realities ahead of it. All our Key Market Factors are in flux and with the addition of some new worries this market is likely to be volatile for a while.
Fed Funds Rate Above 4%
Earlier this year I wrote that if the Fed Funds Rate went above 4% we would likely reduce our stock investments. We still feel that neutral is about 4% and rates above that level will likely slow the economy more. From all indications at this time it looks like we were right. Investors believe that 3rd quarter earnings are going to be fine, its beyond that worries them. Ex-energy the S&P500 is expected to grow earnings about 12% this quarter. At this time analysts are only projecting 10% growth for the same group into next year. High energy costs and the perception of rising inflation are backing them up. Our studies show a notable slow down in the economy. This slow down is likely to continue until rates start to fall. Stay tuned as we navigate through this portion of the business cycle and come up with profitable positions. You can see what we are doing by visiting our website at www.thesmartmoneyinvestor.com.
This market looks pretty bad hopefully that is good news. Volatility as measured by the VIX closed at 16.22 Wednesday, which is a five month high. Around this level I would expect a bounce, however, the stock market's breath stinks and selling has been notably fierce. I am not going to rule out a turn around from here but stocks are more likely to see a dead cat bounce if the buyers come back too soon. For all the reasons I wrote about in my last post the projected fundamentals and ensuing technical characteristics of this market seem to be in sync. It is likely the stock market has more down side to go.
The S&P500 closed at 1178, the sixth day below its 200 day moving average. The longer the index stays below the long term trendline the greater the inertia to get above it again. As bad as the S&P500 has been it is not the real story. Small caps and nasdaq stocks have been hit harder. The nasdaq composite is down 9% from its August high with many high beta stocks dropping 15% or more. Former leaders from tech, energy and the homebuilding sectors have been hit the hardest, signaling a change is leadership is coming.
We continue to reduce positions and look for new opportunities. I am reluctant to short until it becomes technically feasible. By that I mean I want to see a bounce and evaluate the situation before we make the investment. The market is in the middle of correcting as the smart money positions itself for the new market realities ahead of it. All our Key Market Factors are in flux and with the addition of some new worries this market is likely to be volatile for a while.
Fed Funds Rate Above 4%
Earlier this year I wrote that if the Fed Funds Rate went above 4% we would likely reduce our stock investments. We still feel that neutral is about 4% and rates above that level will likely slow the economy more. From all indications at this time it looks like we were right. Investors believe that 3rd quarter earnings are going to be fine, its beyond that worries them. Ex-energy the S&P500 is expected to grow earnings about 12% this quarter. At this time analysts are only projecting 10% growth for the same group into next year. High energy costs and the perception of rising inflation are backing them up. Our studies show a notable slow down in the economy. This slow down is likely to continue until rates start to fall. Stay tuned as we navigate through this portion of the business cycle and come up with profitable positions. You can see what we are doing by visiting our website at www.thesmartmoneyinvestor.com.
- MESA - The airline group has been beaten pretty badly over the last several years. Most of the majors are in re-organization; now opportunities exist for savvy competitors. MESA is one that looks to be one taking advantage of the situation. We are looking at MESA and calculate its intrinsic value at $19/share (currently it is trading at $9.5/share). If higher rates bring down fuel costs airlines are positioned to profit as consumers have become acclimated to higher prices. We are likely to add a position on a pull back.
posted by Burton Hess at 3:03 PM
0 Comments:
Post a Comment
<< Home