The nay sayers, glass half -empty, perma-bears, and high frequency traders did their best to crack my resolve. But beware, when you live out West with three ski resorts out your deck, highs in the high 70’s with no humidity, it take more than Chicken Little to make me croak. East coast types were palpitating about the rare hurricane, Irene, that seemed to be bearing down on Wall Street. With the German DAX and Greece debt in free fall, weather cooperated to make the average hedge fund type positively cataclysmic. Hard to believe the market rebounded 4.5% for the week, but it did.
Everyone is bearish except the people who know their companies the best, the insiders. They continue to buy away but with some reservation. Smaller purchases than I would like to see but buys not sells abound. With the market down 200 points, I stood pat, nibbled a bit and sold some puts on stock I would be willing to own. The VIX is high now so you get a lot of premium for selling options. It’s also near impossible to make any money buying puts and calls unless some extreme event takes over.
How can you be so blind as to ignore the obvious the bears say? The economy is falling off the cliff, the Euro is collapsing, and our budget deficit is unmanageable. Banks around the world are inextricably linked together and the whole shooting match is coming unglued with sovereign debt problems.
My answer. The economy was doing just fine until the Tea Party wrecked it and S&P stomped on it. The economy was not great but contrary to popular opinion, the stock market really doesn’t like a very robust economy with full employment. It means rates are rising and when they get to around 5%, they provide stiff competition for equities. Fortunately we have a long long time before that happens. Stocks are cheap both on a dividend yield and earnings yield vs. Treasuries. The bears answer that interest rates are phony, propped up by the Fed. I may have believed that two or three months ago but now I believe we are in a very low-interest rate environment for some time, long enough to factor it into a discounted cash flow analysis. Using that tool, many many stocks are very cheap.
Warren Buffett seems quite convinced we are not falling into recession. If I had to go with the best economists or someone with 230,000 employees in a variety of businesses, getting first hand daily reports, I’ll go with Uncle Warren’s crystal ball.
The euro is collapsing. Quite the contrary. Greece may default, may leave the EU but the currency acts quite strong. I wish Greece would default and leave the euro. This ultimately would be good for the Greek people and great for the stock market. Europe existed for a thousand years or so before the euro and will exist a thousand years after it. Bring it on, please. Right now 2 yr. Greek government debt is yielding 50%? D0es anyone think that the market hasn’t priced in a substantial default already? Please. I plan on buying drachma denominated securities soon. There are a lot of ways this one can unfold and it is the most fascinating economic event on the horizon. Pay attention. Some outcomes could resemble WWI war reparations. Wait to the Germans try to seize some Greek islands as collateral. All bets are off if the Krauts seize Mykonos as collateral.
So for the time being, let’s state the obvious. Resistance is 1188 on the S&P 500 and the support on the way down is around 1120. Wouldn’t that be great? A narrow band you could trade around for a while. That would be a license to print money using popular overbought-oversold oscillator indicators like Stochastics, MACD, RSI, etc.
I believe we will push the upper band into 1200 ( a nice round number the S&P has had a lot of trouble passing before). That will happen early next week. The hurricane will be a non event by the way. I wish there had been an obvious way to play that. Hedge funds fixed on monthly performance numbers will try to play a little catch up. Down 10 or 13% for the month of August will not be a pretty print. Not that down 7.6% will be much nicer but it is what it is if we are fortunate enough to end around 1200.
I would think that many traders will be flat for the Labor Day weekend. I’m not a day trader so I won’t be flat. Friday could be spooky. Have a great weekend.