Monday, December 23, 2013

Balloon Gets Bigger

It is a game of chicken now, dare to short a freight train?  With the big news from the Fed out of the way, the investors will be piling in, and we have gotten a monster relief rally and pretty big gap up.  I see the low put/call ratios, the high levels of bullish sentiment, and  overbought conditions, but I don't like to short around Christmas.  It usually doesn't go down this time of year.  I will revisit the short side with more conviction in the early parts of January.  Right now, there is little incentive for longs to sell, when they can wait till January and avoid capital gains that they have for 2013.

It will be a slow time for this market, not much to do, but wait for January.


Anonymous said...

MO, I am quite bullish on the equity market from the fundamental perspective.

The equity market downturn post QE 1 was triggered by Europe debt crisis. Post QE 2, the equity market correction was triggered by debt ceiling crisis. Post Op Twist, market was relatively stable. In other words, as usual, a fundamental trigger is required to bring down the equity market.

Housing starts only started to recover meaningfully under Op Twist and QE 3 which significantly brought down the mortgage rate, but not under QE 1 and 2; this means low level of long-term rate is essential to housing recovery. Since July this year, mortgage rate spiked up to about 4.4% but housing starts have been relatively stable, slightly less than 900k. Therefore the recovery momentum in housing might be sustainable.

Initial claims improved meaningfully only during the implementation of QE 1, 2 and Op Twist. Initial claims were flattish approaching the pre-determined end date and remained flattish after the operations had ended. Since the first hint of QE taper in the mid year, initial claims have been declining gradually as well, until the number was distorted by govt shut down. Again, therefore the recovery momentum in employment might be sustainable.

Absence of economy weakness, given there are no imminent Europe debt deadlines and assuming China is not crashing, the odds are the equity market will go higher in the near term. And last week S&P 500 took off with very high volumes, this bull market is pretty solid.

Despite the fundamentals, I agree with MO that the risk/reward to go long in current market condition is not very favorable; I'll wait for the bull trend to establish further after new year.

Welcome comments and inputs. Especially on whether the spike in initial jobless claim in the last two weeks is merely a seasonal outlier or not.

Market Owl said...

I am bearish from a fundamental viewpoint. The earnings growth is just not high enough to support a Schiller P/E ratio around 25, and forward GAAP earnings of 18. Those are nosebleed levels, really only surpassed during the tech bubble. Earnings have received huge tailwinds from a drop in interest rates over the past 5 years. That is no longer there. Financial engineering through stock buybacks has led to extreme valuations.

I don't see where the big jobs growth is coming from. All I see are lower paying service jobs increasing. The spike in initial jobless claims also wouldn't be happening if the job market was as strong as so many believe.