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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.

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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.

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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.

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1 Comment

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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

Long-Term Analysis of the Silver Market

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Silver

The silver market has once again caught investors’ interest as the price is nearing areas not seen since late 2008.

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2017 started at a low point for silver, and it seems it will end the year that way as well, meaning investors who bought at the beginning of the year haven’t suffered nor gained much.

This doesn’t mean, however, that the price hasn’t moved during the year. After the low start of the year, silver quickly tacked on about 18% to a top of $17.50 per ounce.

In terms of fundamentals in the silver market, things look a bit complicated for 2018. There are multiple forces pulling in different directions for the price of silver going forward:

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Positives

  • A sharp stock market correction can be expected to occur some time in 2018. Most likely, this will happen sooner rather than later. Stock market crashes always trigger a flight to safety, meaning gold, silver, and quite possibly bitcoin, can benefit.
  • We are seeing signs that inflation may be starting to rise again, although this is not confirmed yet. Rising inflation is always good for precious metals.
  • If the US federal budget deficit widens as a result of the new tax reform, the US dollar may suffer as a consequence. Goldman Sachs put out a note to investors in November 2017 saying that the US debt is “on track” to reach an “unsustainable” level in coming years. Fed Chair Janet Yellen has also said about the US debt that it is “the type of thing that should keep people awake at night.” Rising debt levels creates uncertainty about the economy, which is generally good for gold and silver.

Negatives

  • Central banks around the world seem committed to raise interest rates in 2018. Rising interest rates are bad for precious metals because it would make it more attractive to put money in the bank.
  • The cryptocurrency bull market is on track to continue, diverting attention and capital away from precious metals as a traditional store of value. However, this one is uncertain, as it may also be considered a positive in the way that the rise of cryptocurrencies brings the inflationary and unsustainable nature of fiat currencies into focus.
  • The US dollar may have hit a bottom in 2017 and trade higher compared to other major fiat currencies going into 2018. A stronger dollar is always bad for precious metals, which are priced in dollars.

Silver chart

When looking at the chart, we can see that silver is back down to were it started the year, which coincides with a major support area where it has turned several times in the past few years.

From a technical perspective, silver has been trading in a triangle pattern on the longer-term weekly chart, with the price now trading very near the lower end of the triangle, adding confluence to our bias that silver will trade up from here.

Silver failed to live up to our prediction from early 2017, and is now even trading well below the level from that time.

A low price by any measure combined with two major technical support levels adds confidence to our trade and makes silver a low risk and potentially high reward trade for 2018.

Depending on your own strategy and investment style, you may want to wait for the price to break out from the current triangle pattern it has been trading in for the past year and a half. You would then give up some of the potential return for an even safer trade. After that, major resistance is found around $17.50 and $18, with lots of upside potential if we can finally break through those levels.

Featured image from Pixabay.

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Analysis

Long-Term Cryptocurrency Analysis: Look Out Below?

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After last week’s observation that a major top is in or near in the segment, the Bitcoin surge continued for almost a week, with Thursday’s wild session taking the coin as high as $19,000 (the article uses Bitstamp prices) on some exchanges. While the currency already pulled back by more than 20% the long-term picture is still extremely overbought and a much deeper correction is likely in the coming weeks.

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BTC spiked below $13,000 today, violating the primary weak support at $13,300, with further levels now at $11,300, $10,000 and $9000, but stronger support only found at $8200 and $7700. Next week’s futures launch could cause another jump in trading activity, and volatility is expected to remain very high amid the likely correction.

BTC/USD, Daily Chart Analysis

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While not all altcoins participated in the, supposedly, last part of the rally, IOTA, Monero, and towards the end of the week Litecoin, also stretched above all conventional targets with IOTA also turning exponential after a deal with Microsoft. The coin exploded by more than 350% before entering an initial sharp correction, breaking the steepest short-term uptrend. Strong support is only found at $3 and $1.5, but potential Fibonacci support is at $2.35.

IOT/USD, Daily Chart Analysis

Let’s see how the long-term charts of the other altcoins look after the crazy week.

(more…)

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Analysis

Daily Analysis: Stocks Rise on Mixed Jobs Report, Bank gains as Bitcoin Wobbles

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Friday Market Recap

Asset Current Value Daily Change
S&P 500 2651 0.45%
DAX 13153 0.85%
WTI Crude Oil 57.34 1.12%
GOLD 1250.00 0.21%
Bitcoin 15775 -4.10%
EUR/USD 1.1774 -0.01%

The “Week of Bitcoin” ended on a positive note regarding traditional financial assets, with several bullish catalysts helping the recently struggling indices in Europe and the US. Asia settled down after a period of pronounced weakness, the finalized framework of the new regulation of the European banking sector favored the banks, end the US employment report was mixed enough but not too bad to help equities. While these don’t sound that bullish from a long-term perspective, in the world of central bank dependency, a sluggish growth environment fuels the yield-seeking rally in stocks.

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S&P 500 at All-Time Highs, 4-Hour Chart Analysis

Short-term rates declined thanks to the slightly negative economic news, and as Trump’s decision regarding Jerusalem sparked widespread protests in the Middle East, gold and long-dated treasuries rebounded, as a sign of moderate safe-haven flows. The VIX shrugged off the geopolitical fears and stock volatility plunged back near its recent record lows, while the DOW and the S&P 500 finished on new all-time closing highs, even as the intraday highs from Monday are still ahead of the benchmarks.

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Last night’s Brexit deal caused a “sell the news” dip in the Great British Pound even amid the risk-on sentiment, as the currency lost ground compared to its major counterparts, while the rest of the forex complex finished a choppy session close to unchanged on the eventful day.

EUR/GBP, 4-Hour Chart Analysis

Cryptocurrencies

All eyes were still on Bitcoin and the major altcoins as trading activity skyrocketed in the cryptocurrency segment thanks to the exponential rally and the sharp correction in the market of BTC. The coin hit a new all-time high on all exchanges, albeit at widely diverging levels, as several exchanges broke under the weight of the record volumes.

Bitcoin fell as much as $3000, more than 20% top-to-bottom, but as we speak the currency is regaining momentum and we might be in for another interesting weekend in the segment. While it seems very likely that a sharp correction is just around the corner, picking a top in BTC is not an easy feat, even as the momentum indicators are off the charts.

BTC/USD, 4-Hour Chart Analysis

Altcoins benefited from the early sell-off in Bitcoin, and Litecoin even rallied to a fresh all-time high, while the other majors rose significantly as well.  Although the currency and the segment as a whole are stretched by all measures, and the risks of a “fake-out” our high, speculative flows could propel another rally in LTC.

LTC/USD, 4-Hour Chart Analysis

Key Economic Releases on Friday

Time, CET Country Release Actual Expected Previous
1:50 JAPAN GDP 0.6% 0.4% 0.3%
Tent. CHINA Trade Balance 264 bill 231 bill 254 bill
11:30 UK Manufacturing Production 0.1% 0.1% 0.7%
15:30 US Hourly Earnings 0.2% 0.3% 0.0%
15:30 US Non Farm Payrolls 228,000 198,000 261,000

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