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Analysis

Time To Short The Market?

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The six-year bull market is coming to an end, some say.

To profit from falling stocks, short investors borrow shares and sell them, believing the shares will be cheaper to buy back and return to lenders in the future. But when a short call is incorrect and the stock rises, the downside can be hard.

David Tepper, a billionaire investor, said during a recent CNBC interview that stocks are cheap at current levels — and shorting the market may not be the best strategy moving forward, according to benzinga.com.

Tepper’s view is based on developments in Washington. President Donald Trump’s administration has indicated it won’t be placing additional regulations on business which in itself is encouraging investors.

Tepper further noted that “every region of the world is growing” and that the growth is “synchronized.”

Concerns of a trade war with China have diminished, Tepper said. In addition, he is confident that the rhetoric flying between the U.S. and Mexico will subside.

Finally, Tepper argued that the Federal Reserve has signaled it will raise interest rates, a rising interest rate environment won’t impede growth.

A Bearish Market Isn’t Definite

Tepper is not the only pro to advise against betting on a bearish market.

The Standard & Poor’s 500 index through Friday had fallen 8.6% from its peak, far short of the minimum 20% fall to be considered a bear market, according to The Los Angeles Times.

Bearish signs do exist. Global economic fears, rising interest rates and weak corporate earnings affect stocks. But if a bear market is coming, there’s no reason yet to act.

Individual stocks in heavy machinery, energy and biotech have fallen 20% from 2015 highs. But the losses are modest in the food, technology, home building and utility sectors. The typical mutual fund with a mix of U.S. big company stocks fell 7.5 in the third quarter and is down 6.5% to date, according to Morningstar.

Every stock sell-off does not bring a bear market. Since the bull market started in March 2009, the S&P 500 has seen seven declines of 7% or more, excluding the current slide, according to Yardeni Research.

The 2011 sell-off was the only one approaching bear market territory. The index fell 19.4% before it recovered.

How Long Can The Bull Market Last?

The current bull market is getting old by historic standards. That in itself is giving cause for expectation of a bear market. But according to James Stack, an InveTech Research money manager and market historian, it takes a fundamental factor like a recession or skyrocketing interest rates to kill a bull market.

Economic indicators still favor growth. The Conference Board’s leading economic index is positive. Consumer spending is still strong, as are car sales, and the economy is creating jobs.

The global economy is struggling, undermining profits. This has caused a devaluation of foreign currencies against the dollar, making harder for U.S. exporters to compete.
Devalued foreign currencies hurt profits that U.S. firms create abroad.

When China drove its currency down 2% against the dollar, that created fears of a Chinese slowdown, causing Chinese stocks to fall and bringing other markets down with them.

But U.S. stocks are not cheap according to standard measures. The market’s price-to-earnings ratio – stock prices divided by earnings per share, is positive for the S&P 500.

What To Look For Before Shorting

The Bank of America Merrill Lynch strategists, led by Michael Hartnett,
are waiting for signals in four key areas “before calling for The Big Short,” according to MarketWatch:

• unambiguous signs of bullish investor positioning
• similarly enthusiastic profit expectations
• hawkish policies from both the Fed and the European Central Bank
• outperformance by last year’s laggard risk assets, such as European stocks

Unlike buying a common stock, where it is possible to initiate a position and hold indefinitely, selling short requires watching the market closely since losses on a short position are theoretically unlimited.

Short selling, while potentially lucrative, is a highly specialized field. When a short call is incorrect and the stock rises, the downside can be great.

Jesse Lauriston Livermore reportedly made fortunes short selling stocks in both the 1907 and 1929 market crashes, but he ended up losing his fortune. It is believed he turned bullish prematurely and bought stocks before the market bottomed in the summer of 1932, according to Wikipedia.

How Have The Shorters Fared?

Shorting is a specialty, and even the specialists have not all fared well.

James Chanos’ $3 billion Kynikos Associates hedge fund firm is known for shorting stocks. In 2015, Chanos’s short-only fund called Ursus was up 10%, trouncing the S&P 500, according to Fortune.

But life has been hard for many short investors in recent years. The gains from 2009 to mid-2015 saddled many with big losses.

One dollar invested in Ursus at the beginning of 2007 would have been worth about 68 cents at the end of 2015, according to its investors. Those who didn’t get in until 2009—when the last bull market started—$1 would have fallen to about 38 cents.

David Einhorn, renowned for a timely short of Lehman Brothers in 2008, made a number of unsuccessful short bets since then—including against Chipotle and Green Mountain Coffee Roasters.

Kingsford Capital Management, a short-only firm, fell to about $250 million in assets in 2015 from $1.8 billion in 2008, according to its investors.

Not all the loss was from investing losses. Kingsford founder Mike Wilkins gave about $800 million back to investors at the end of 2008, judging it would have been hard to find shorts following that year’s bear market. The firm finally broke its losing streak in 2015, registering a 5% gain.

For most money managers, shorting serves as a hedge against losses elsewhere in their portfolios.

Greater scale can allow short specialists to draw institutional investors looking for a hedge. This is one reason Chanos has been able to remain in the game since the early 1980s. He diversifies with around 50 short positions at any given time.

While broad-based short-biased hedge funds have fallen, an uptick has emerged in managers making public short bets.

Short sellers do extensive and costly research. Their losses can add up fast if a short seller doesn’t have the capital to wait it out.

Besides Chanos, few of the well-known “activist shorts” are mainly short-sellers.

GeoInvesting and Muddy Waters, research firms that earned credibility exposing Chinese stock frauds, started hedge funds that channel analysis into short bets.

Shorting the market can pay big, but whether now is the right time is a hard call to make.

Images from Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.9 stars on average, based on 8 rated postsLester Coleman is a veteran business journalist based in the United States. He has covered the payments industry for several years and is available for writing assignments.




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  1. corporate_citizen

    March 25, 2017 at 5:34 pm

    The risk in shorting U.S. equities, in my opinion, is the specter of flight capital seeking safe harbor in the liquid U.S. equity market. With sovereign debt at record highs, i.e., low (and some negative) interest rates and the messy economies of the Eurozone, Latin America, Japan etc., I could see the stock market continuing to rise despite the usual indicators which would normally indicate economic slowdown. I also think we need to see the typical euphoric stage and crazier valuations where retail investors are fully participating. Notwithstanding the occasional hard dips, we may have another couple of years to go to the upside.

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Analysis

Stocks Go Nowhere Ahead of the Fed

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Global stock markets had a very quiet Tuesday, as traders took a step back before tomorrow much-awaited Fed rate decision. While most of the major indices finished the day virtually unchanged, risk assets gained ground in general, as investors sentiment improved following the slightly nervous Monday session.

DAX 30 Index Futures, 4-Hour Chart Analysis

European and Asian stocks were steadily holding on to last week’s gains, with even the Chinese market settling down with only slight losses, despite the country’s exit from the scheduled trade talks with the US.

On Wall Street, the Nasdaq and the Russell 2000 outperformed the Dow and the S&P 500, signaling a risk-on shift under-the-hood, even as the major indices traded in very narrow ranges in the low-volume low-volatility environment.

EUR/USD, 4-Hour Chart Analysis

Currencies had a much more active season, even as the major pairs didn’t experience real trending moves, before the central bank meeting. The EUR/USD pair, which has been in the center of attention for days finished with small gains after some sudden spikes in both directions, as traders tried to bet on tomorrow’s renewed guidance by the Fed.

In economic news, the US CB Consumer Confidence Index came in above expected at 138.2, a 17-year high, just shy of the all-time high set in 2000, right at the time of the peak of the Dot-Com bubble. On the other hand, the Case-Shiller Housing Price Index missed the already modest consensus estimate, with an only 5.9% yearly price increase, once again confirming the slowdown in the segment in the rising yield environment.

XHB (Homebuilder ETF), 4-Hour Chart Analysis

Shares in the sector are down by 20% on average compared to the January bull market high, and as Treasury yields in the US are still hitting multi-year or even decade-long highs across the yield curve, further pain could be ahead for bulls in the coming months.

That said, a dovish surprise tomorrow could set up a pullback in yields and a possible bounce in the sector, even as the general tightening trend will almost certainly persist for a while.

Rate Hike Near Certainty with All Eyes on the Fed’s Guidance

The odds of the third hike this year by the Fed are almost 100% for tomorrow, but even major changes, and sizeable surprises are possible, with regards to the economic guidance and the Central Bank’s preferred monetary as well.

2-Year US Treasury Yield, 4-Hour Chart Analysis

The US-China trade war could serve as a dovish excuse, despite its limited effects so far, while the US economy provided plenty of ammunition to hawks, such as strong growth, an uptick in some of the key inflation measures, and a tight labor market.

While the 2-Year Treasury yield failed to close at a new cycle high, the short-end of the curve is at a decade-long high, so a bigger surprise could lead to a very volatile afternoon session tomorrow.

Copper Futures, 4-Hour Chart Analysis

Commodities also had a mostly quiet and mixed session with WTI Crude oil slightly retreating off its 10-week high near $73 per barrel and gold holding on near the $1205 level, but copper experiencing more volatility and closing with muted losses after Chinese markets reopened.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Analysis

Ripple: One Thing That Doesn’t Make Sense

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If you are bored or just tired of reading about Washington politics, just come over to the crypto world.  But be warned, the headlines can be just as singularly focused and confusing as anything inside the beltway.  Like Ripple for example, it has had everybody talking for the last week. The coming week is likely to be no different. All eyes will be on XRP.

Ripple, of course, is the crypto force that offers its payment networks as settlement infrastructure technology to a growing number of major financial institutions such as UBS, Santander and UniCredit.

Using Ripple, banks can bypass the antiquated SWIFT system. This cuts transfer of international payments to a few seconds from something like three days.  That could save banks billions in fees.

Ripple’s XRP token has had it share of critics, some of which is reflected in XRP being one of the worst performing cryptos this year falling from $3.65 in March to $0.26 on September 13th.

Sudden About Face

Since then, everything has been uphill.  It started a few days ago when CNBC hosted Ripple’s Sagar Sarbhai.  The interview touted high speed xRapid as ready for commercial launch.  Sagar also presented a laundry list of 120 banks that were on board with its xCurrent software.

That interview lit a spark that resulted in a double in the price of XRP and grabbed the attention of just about everyone in the crypto community. Strong technical buy signals were flashing.  In addition announcing that two new banking clients (NCB of Saudi Arabia and PNC) had joined RippleNet, all other fingers were pointing to Sagar’s xRapid announcement.

Following all this comes the headline in Business Cloud website: RIPPLE CRYPTOCURRENCY TO HIT KEY $1 THRESHOLD, PREDICTS CEO Nigel Green, founder of deVere Group, the world’s largest independent financial advisory organization. If that weren’t bold enough, Green’s $1 prediction is for year-end.

Upcoming SWELL Conference Prompts Even More Speculation

There seems to be some real substance behind Sarbhai’s CNBC interview. On October 1-2, Ripple is hosting the SWELL event in San Francisco, CA. The event is meant to connect the world’s leading experts in policy, payments and technology for a proactive dialogue in global payments today.

The event will be packed with political literati including former President Clinton. It is easy to conclude that Ripple is geared up for a major news event. Speculation is that xRapid will be announced and given a date for launch.  When you consider that a keynote address from Bill Clinton could cost Ripple well over $100,000 why would they waste his star power on simple chit chat.

Looking Good

It is fair to say that recent news and the prospects for a potential bombshell announcement next put Ripple in as good a position as it has been in some time.  Who would ever sell XRP at this point? The Wall Street Journal reports that Jed McCaleb, one of the co-founders of both Ripple and Stellar, “has recently stepped up sales of billions of XRP tokens he is thought to own”.  Back in 2013 he owned 9 billion XRP tokens.

OK, so every once in awhile, every crypto entrepreneur needs to pay the rent, but this is more than chump change. To keep things in balance, McCaleb has not worked with Ripple for about five years and, under his lockup agreement, he is entitled to sell up to 750 million XRP annually once year five is passed.  That should be enough dough to pay just about anybody’s rent. Lately, however, the desire to get out of XRP has pushed beyond the lockup agreement.

Why Would Anyone Sell XRP?

With all the good news ahead and the long term outlook for Ripple never looking brighter, who wouldn’t want to own XRP?  This is even more curious given the depressed nature of the XRP price.

Everyone who owns an asset has the right to making independent decisions and there may be special things in McCaleb’s plan that factor into his urgency to sell.  However, there is a section in Investment Analysis 101 that says to ask lots of questions when founders and large inside owners are sellers.

One thing is obvious. After a thoroughly frustrating 2018, there are more reasons to own XRP than to be selling.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.4 stars on average, based on 107 rated postsJames Waggoner is a veteran Wall Street analyst and hedge fund manager who has spent the past few years researching the fintech possibilities of cryptocurrencies. He has a special passion for writing about the future of crypto.




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Analysis

Long-Term Cryptocurrency Analysis: Bearish Trend Intact Despite Explosive Rally Attempts

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The negative trend in the cryptocurrency segment continues to be dominant, with almost all of the top coins trading below the structural support levels that were broken during the summer months. Bitcoin is still above the $5850 level, the last base support before last winter’s explosive speculative event, but Ethereum, Ripple, Litecoin, and the other main altcoins all continued relentlessly lower.

Most of the majors formed a bottom in August, even though Ethereum continued to lead the way lower amid the bleak sentiment and capital flight. Several oversold rally attempts already failed in the segment, leaving the long-term declining trends intact, with last week Ripple providing hope for bulls with its explosive move higher.

While some of the coins tried to follow Ripple higher, the development of a healthy leadership failed yet again, add our trend model continues to be overwhelmingly bearish from a long-term perspective. With that in mind, the short-term buy signals should still be treated cautiously by traders. The August lows are not in direct danger right now, and a more durable bottom might already be in, but a broader rally would be needed to confirm a trend change.

BTC/USD, Daily Chart Analysis

While BTC has been holding on relatively well during the summer months, in the past weeks, as the largest coin was hurt by selling related to large wallets. The coin failed to show bullish momentum despite its stability, and a break below the key long-term support zone near $5850 is still possible here.

Primary support is at $6275, and in the case of a breakdown below $5850, the next major support zone is found near $5000, while resistance is ahead at $7000, between $7200 and $7300, and in the $7650-$7800.

ETH/USD, Daily Chart Analysis

After spiking below $180 and forming a panic-bottom, Ethereum rallied up to $260, but due to the extent of the preceding decline, it didn’t reach the declining trendlines which dominated the market for several months. The coin has been leading the selloff in the segment, and now a re-test of the lows is once again likely, even if a more durable bottom is already in.

Short-term support is found at $200 and $180, while below the recent low, further zones are found near $160 and $130, with resistance zones ahead between $275 and$280, near $300, and in the $330-$335 zone.

(more…)

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 354 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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