A Few More Comments About This Week's Action
Amazing. That is what I feel when I read many of my favorite blogs and see the emotional swings back and forth over the last few weeks. The Dow is about fifty points higher than it was two months ago and the vibe seems to have totally changed. Just a week ago gloomers were pointing to the end of mankind and perma-bulls are now courting Goldilocks. The gloomers have been quite quiet over the massive assault this week. I'm sure they are questioning their dire predictions for the end of civilization. This run has caught many off guard. I never discount wild action during this week for reasons previously mentioned. This is a week of wonder if you like volatility. I love volatility. If every day were like the last three, whether up or down, I'd day trade for a living. That said, I surely didn't expect the semis to make as large of a move as they did. I'm not sure I see the data supporting a short covering rally as Cramer has mentioned but maybe that is what happened. In any event, big money has the ability to do big things whenever it feels like it. Those moves are usually temporary but markets are absolutely manipulated in the short run.
One needs to maintain their senses through this week. Yes the semis have made a massive assault. But, without adding it up, I would say the annualized return over the past three or four days is probably 700%. So, put your logic cap on and ask yourself if this type of action is sustainable over time. Remember, most semis and semi equipment companies are guiding downward in their future business outlook. Are they headed for a 700% return this year? A 70% return? A 7% return? The semis have been in a bear market pretty much since December of 2003 as defined by the HOLDRS and the classical definition of a bear market. I noted about a month ago that semiconductor stocks would be selling below a price of zero within a month or two if they kept up their then rate of decline and that it would not continue.
So, why the massive move in semis? And, you need to understand it is highly concentrated in the semis, telecom, retail and some ancillary tech buying as well. Look at the open interest in the SMH August options. Something funny going on there in the distribution. A little low volume summer gamesmanship? AMD had gone from $45 to 18 in two months. What did everyone expect? AMD would continue on that descent for another year? In fact, I wrote this very sentence a month or so ago. If that were to happen that would put the decline at another $120 in absolute terms.
I had this same discussion with a friend who called me in a panic in July. "What do I do?". Well, I said the same thing to him as I have said many times before. Stocks don't go straight up and they don't go straight down. Well, at least since trading curbs they don't. At that time the Naz was down over ten percent in a short period of time. I told him at the current pace of decline the market would end up at zero by the end of the year and if I were him I would hold for an impending reflex of some sorts. Reflexes are typical and natural. People find value. People form different opinions about the future. Big money sees an opportunity to jam heavily shorted positions. Whatever.
One must remember there will be a rotation out of late stage businesses into early stage businesses as the bulls and buy & hold crew anticipates a soft landing. They look down their chart and see someone told them which sectors lead an economic recovery or in this case a mid cycle resumption. I have no idea if this is the start of such a sustained move or not. I can tell you my most important quantitative work is not confirming this move. But, is everyone always right? If so, I want some of that action. But right now I am not inclined to chase.
But as I wrote with homebuilders there will be investors that have found value in AMD, as an example, down 70%. Personally, I find zero value in semis at this point but let's see what happens. The point is as money rotates into early stage stocks, these companies will find support be it temporary or lasting or be it here or later. The economic data has not progressed far enough for the bulls to throw in the towel so they are going to do what they always do: buy the dips. One day that strategy will fail should we have a hard landing. I see no way around a hard landing.
If a new bull market begins, you aren't going to miss it. The homebuilders, semis, retailers, tech, durables and half a dozen other sectors are such a mess it would take them three to six months just to get back to 2004, 2005 or 2006 highs. Then we have an assault to higher highs beyond that. Logic, logic, logic. We all must fight our emotions. All we saw the last few days was some gyrating. And, might I add some very weak gyrating as time passed.
One needs to maintain their senses through this week. Yes the semis have made a massive assault. But, without adding it up, I would say the annualized return over the past three or four days is probably 700%. So, put your logic cap on and ask yourself if this type of action is sustainable over time. Remember, most semis and semi equipment companies are guiding downward in their future business outlook. Are they headed for a 700% return this year? A 70% return? A 7% return? The semis have been in a bear market pretty much since December of 2003 as defined by the HOLDRS and the classical definition of a bear market. I noted about a month ago that semiconductor stocks would be selling below a price of zero within a month or two if they kept up their then rate of decline and that it would not continue.
So, why the massive move in semis? And, you need to understand it is highly concentrated in the semis, telecom, retail and some ancillary tech buying as well. Look at the open interest in the SMH August options. Something funny going on there in the distribution. A little low volume summer gamesmanship? AMD had gone from $45 to 18 in two months. What did everyone expect? AMD would continue on that descent for another year? In fact, I wrote this very sentence a month or so ago. If that were to happen that would put the decline at another $120 in absolute terms.
I had this same discussion with a friend who called me in a panic in July. "What do I do?". Well, I said the same thing to him as I have said many times before. Stocks don't go straight up and they don't go straight down. Well, at least since trading curbs they don't. At that time the Naz was down over ten percent in a short period of time. I told him at the current pace of decline the market would end up at zero by the end of the year and if I were him I would hold for an impending reflex of some sorts. Reflexes are typical and natural. People find value. People form different opinions about the future. Big money sees an opportunity to jam heavily shorted positions. Whatever.
One must remember there will be a rotation out of late stage businesses into early stage businesses as the bulls and buy & hold crew anticipates a soft landing. They look down their chart and see someone told them which sectors lead an economic recovery or in this case a mid cycle resumption. I have no idea if this is the start of such a sustained move or not. I can tell you my most important quantitative work is not confirming this move. But, is everyone always right? If so, I want some of that action. But right now I am not inclined to chase.
But as I wrote with homebuilders there will be investors that have found value in AMD, as an example, down 70%. Personally, I find zero value in semis at this point but let's see what happens. The point is as money rotates into early stage stocks, these companies will find support be it temporary or lasting or be it here or later. The economic data has not progressed far enough for the bulls to throw in the towel so they are going to do what they always do: buy the dips. One day that strategy will fail should we have a hard landing. I see no way around a hard landing.
If a new bull market begins, you aren't going to miss it. The homebuilders, semis, retailers, tech, durables and half a dozen other sectors are such a mess it would take them three to six months just to get back to 2004, 2005 or 2006 highs. Then we have an assault to higher highs beyond that. Logic, logic, logic. We all must fight our emotions. All we saw the last few days was some gyrating. And, might I add some very weak gyrating as time passed.
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