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Guest Post: Welcome To The Casino
Submitted by Trigger$ and Shane Obata ( @sobtata416 ),
Fundamentals are always important over the long term. That said, it has become quite clear that company financials are not what’s moving this market. As you’ll see in the following chart, QE has been boosting the S&P 500 since 2009.
If fundamentals mattered then the words and decisions of central bankers wouldn’t be the most important headlines. We’ve all seen the charts that compare the S&P 500 and the fed’s balance sheet. Since 2009, the correlation is almost perfect
QE and zero interest rate policies are forcing people to chase for yield. It’s completely unfair to repress interest rates because it punishes savers. Right now, it’s expensive to hold cash because of inflation and low interest rates. By holding down rates, the fed is masking the risk of financial assets. People who would otherwise keep their money in a savings account are buying high yield bonds and stocks because they want to maintain their purchasing power. The following chart shows that the spread between high yield bonds and treasuries has been in decline since the financial crisis. This is a result of a high demand for income generating assets.
n sum, the fed’s policies have caused stock prices to diverge from economic reality. Real median household income has been in decline since the late 90s. In contrast, stock prices have rallied dramatically since the financial crisis in 07-08.
The purpose here is not to prove that the S&P 500 is going to drop 86% like it did from 1930 to 1932.
What we’re going to consider is the psychology behind the markets. I feel as though the markets have tended to move in similar waves because of how people think about stocks. Every market cycle is characterized by similar emotions such as greed and fear. The next chart depicts a market psychology cycle. At this point, it’s hard to dispute that we’re in the mid-late stages of the mania phase.
Simply put, the economic fundamentals do not support stock prices. Often times, in the later stages of a bull market stocks will melt upwards before falling abruptly. The next chart courtesy of www.bloombergbriefs.com compares today’s market with the 1929 crash and the Nikkei’s 1989 collapse. It’s important to note that the rate of increase in stock prices – was higher right before the subsequent fall. In other words, the slope was steepest immediately before the eventual downturn.
In the next section we’re going to look at some momentum stocks – they’re stocks whose prices are so disconnected from their financials that no one really knows how much they’re worth. What’s interesting that a lot of these companies are exhibiting the same patterns that are often seen with bubbles.
Before we continue let’s talk about the Williams %R Indicator. It is a momentum indicator that is commonly used to indicate overbought or oversold conditions. However, through learning the HPTZ Methodology I have considered another perspective. When the indicator reaches extreme levels (-20/-80) it suggests positive or negative pressure on the market that has been shown to sustain runs or trends. If you examine the writings of Williams he discusses the use of the indicator as overbought or oversold only after an extreme has been reached and after a certain number of bars have passed.
First let’s take a look at $LNG. On the monthly chart we can see that Cheniere has been ramping up for a while now. Furthemore, the monthly williams %R has been trending up steadily for years. On the weekly chart the red arrows indicate 4 different slopes. Each new slope is steeper than the last which means that $LNG’s price is increasing at a faster rate. The Williams %R on the weekly is still above -20 which is indicative of positive pressure.
The hourly chart shows that $LNG continues to rise steadily. On the daily chart we can see that the daily Williams %R is showing signs of positive pressure at -15.53.
The next company that we’re going to look is is $CELG. On the monthly chart it looks as though it almost went vertical. Furthemore, the monthly Williams %R – which is at -49.02 – hasn’t fallen below -80 since the beginning of 2011. The weekly chart shows that after rising steadily from 2009 to the end of 2012, $CELG begin a rapid ascent at the beginning of 2013. It has pulled back since the beginning of 2014 and the Williams %R is at -99.21; this is the first time it has been below -80 since the summer of 2013.
The hourly chart shows that Celgene has been selling off for a little over a month or so. On the daily chart we can see that after an orderly rise from April of 2013 to the beginning of 2014, $CELG has now fallen off a bit. Celgene is now falling at a faster rate and the Williams %R has fallen below -80 remains in a downtrend.
The last company we’re going to look at is Gilead Sciences. It’s rapid ascent is best captured by the monthly chart. The monthly Williams %R is now at -38.42 – the lowest it has been since early 2012. On the weekly chart we can see that $GILD began to accelerate at the beginning of 2013. The recent downfall has sent the weekly Williams %R below -80 for the first time since the fall of 2012.
On the hourly chart we can see that $GILD has been in a downtrend since the beginning of march. The daily chart shows that the Williams %R is at -92.83 and hasn’t been above -20 since late February.
$LNG, $CELG, and $GILD are three examples of stocks that have made tremendous gains over the past few years. The takeaway point is that many stocks are trading above what most people would consider reasonable valuations. A lot of the time, these companies aren’t even profitable. On a trailing twelve month basis, $LNG hasn’t made a profit in the last 5 years. Both $CELG and $GILD are profitable, however their stock prices are growing at a much faster rate than their cash flows and net income are.
Is this the top? There’s no way to tell. Do some areas of the market look like past bubbles once did? Without a doubt.
The last step up before the fall is often characterized by a feeling that the market is invincible. Despite the S&P’s incredible run, it cannot continue to rally forever. Eventually, economic fundamentals will matter again and when that happens it’s likely that the market will sell off.
George Santayana once said that “those who cannot remember the past are condemned to repeat it”
Source: Shane Obata ( @sobata416 )
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Look at this fuckin mess
http://www.bloomberg.com/news/2014-04-08/banker-dumps-wall-street-to-boo...
Where have all the regulators gone?
Long time passing
Where have all the Good Men gone?
Long long time ago
When will they ever learn?
The fake Twitter account is pretty funny.
https://twitter.com/Prince_Gustave
"... chase for yield..."
Maybe chase some gold instead.
I like how they always say "chase" yield. I guess it sounds better than "beg and plead for junk bond anal leakage" or "pander for some scraps from the dingleberry's of overvalued megacaps".
No, people "chase" yield. implying that even though zirp forced them to do so, when they get slammed for it, they had it coming
You keep questioning your central planning masters like that and you DO deserve what you have coming. I got out of my overload-position in JNK a year ago. I was way early. I knew I was early, but I didn't expect I'd be this early. I figured a QE taper announcement was likely, and it was. Somehow, though, it didn't sink the junk bond market.
You know what I learned? The bond market has nothing to do with the stock market, except intra-day. Year after year after fucking year, the bond market is clicking along in a JAPAN-LIKE FOG. Did I just say Japan? You're fucking right I said Japan.
If you're after "yield" there is nothing any more or less risky about (US) junk bonds than there is about Treasuries. When bonds get slaughterd they will ALL get slaughtered. Credit rating won't matter. Until that day comes, the only difference between high quality bonds and junk is how much interest you earn up to that point.
I just reloaded.
The talk of the coming bond slaughter started years ago. Will it come once QE ends? Will it take another year after that? What if long rates actually drop because of China and/or US demographics...maybe HY ends up being properly priced.
In this environment, I recommend an asset allocation of 50% lotto scratch offs and the remaining 50% at the dog track
I like the $GILD chart because it has a kitty.
Where's the chart with Scooby Doo and Shaggy and doobies?
I know man. At the end of the article, he mispelled Santana and I don't recognize that album cover either.
Holy shitballs, that article got complicated in a right-quick hurry, didn't it?
the caption of Obummer whacking off in the library was pretty funny
Just remember that the Williams %R indicator is the inverse of the Fast Stochastic Oscillator.
Did I just say that?
Just remember that the crux of the biscuit is the apostrophe.
Did Matching Mole just Hatfield and the North?
Moles...myopic!
(This is weird but I have both Matching Moles and the first Hatfield and the North on vinyl.)
http://www.amazon.com/Little-Red-Record-Matching-Mole/dp/B006TX26Q8
Lots of great charts, but here's what you missed:
There is no place for the "money" to go, and you neglected the forces that make it so.
Loosing a little bit to inflation in cash is much better than loosing half of it in the next major correction.
Loose / lose
Dipshit
it could shift into buying tangiable goods. The modern economy that has evolved over the last several decades is loaded with interwoven contracts reeking of contagion. I contend that if faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar.
In a recent article I wrote "never before has mankind diverted such a large percentage of wealth into intangible products or goods and made the claim this is the primary reason that inflation has not raised its ugly head or become a major economic issue in recent years."
Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply. The article below delves deeper into this idea.
http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....
Thanks for the faces in the graphs, and the parallels to 1929.
Do you need a hammer or chisel to make a Big Mac?
The Hulk was a nice touch.
Hammer to make the burger.
Chisel to remove the inevitable shrapnel from the back of the toilet.
You need a hammer to manisel a chisel.... Dawg
Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. Have these actions really worked or merely masked over major flaws and problems?
Just for fun, consider that by not demanding the right kind of growth and by throwing money at problems we have only delayed and added to festering issues that face us in the future. In what most of us view as a fast moving world many people have come to think if a financial crisis doesn't occur today or in the next few weeks it is simply not going to happen at all. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/01/have-we-been-lulled-into-complace...
I tried to jerk off to this chart porn but it was just too overwhelming.
Anatomy of a bubble... a great explanation without so much eye candy.
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
or you can just spend it like there is no tomorrow on wine, women and song and dying in the gutter broke.
Quote
"I spent a lot of money on booze, birds and fast cars - the rest I just squandered."
George Best, Philosopher
Whether it was intended or not, the Fed, by its ZIRP, has placed the pension funds (those chasing yields) on the path to bankruptcy and consequently the pensioners. The consequences of the next inevitable collapse to the pensioners are going to be horrific. Those living comfortably on their pensions might become wholly dependent on social security. We can even expect a spate of suicides from senior citizens. Horrible times ahead indeed!