Search This Blog

Saturday, February 12, 2011

Market Thought... confusion in the air

There is just so much confusion right night. Everyone thinks there will be a correction due to the velocity of the market or wants to see a correction to get in. I too am not immune to this confusion as per my 'say when?' post. So I repositioned all of my options to reduce risk while being exposed to an upward movement.

The problem with my 'say when?' post is that its based on the assumption that 88 is the SP500 eps. But what if the eps is really 90? And what if that leads to an 2011 SP500 eps of 96? A higher eps would give even more fundamental credence to the thesis of a new 'trading dynamic' to take place very soon. (And when we look at individual names, we still are not over extended yet. To say we are would mean AAPL approaches 380, or IBM approaches 180 etc)

My recent fear that Mubarak's stubbornness would of caused a tipping point was abated. Albeit, there is still a ton of uncertainty for Egypt, but now the 'systemic?' post still stands (there is none via Egypt).

So here is the gist of what I feel, barring the confusion this post created :)

We are in limbo, w/no systemic risk to the system, causing the big-boys to add positions as they decline. (Because AAPL in the 340s is a steal when you know its high-end range is 390 next quarter, or even 380 for its low end, via a forward trailing PE analysis.) This usually causes markets to rise, and we find ourselves with a new trading dynamic.


  1. While you say (no doubt with justice) that AAPL and IBM are not overvalued at current prices (as I suspect is also true of some health care stocks), are there not stocks one could point to that do suggest some speculative overvaluation? Perhaps that's only expectable at this stage of a bull market, but it's a side of things you don't seem to look at.

    Looking forward as always to your valued opinions.

  2. That is a good point. There is a list of 'high growth' stocks I keep an eye on in case they act as a tell for market cracks. But all-in-all, its a mixed bag. AKAM is the only real stand out w/respect to weakness, the rest re-confirm strength or don't say much of a market top. For instance, a stock like GERN (which I think is a good spec. w/in the biotech space, not for its stem-cell stuff, but more for its Telomerase Inhibitor) is not acting like a top. Or AXPW.ob, I think a very decent spec play, is also not acting like there is a market top. (With the info out there right now, it would be trading in the $2-3 range, if not higher, if that were the case.) Usually we would see relatively decent spec plays start blowing up, w/minimal or bs news. I just do not see that right now.

    Within the high growth/spec stocks, I see orderly justified stock movement.

  3. I was hoping you might think of names I had in mind, but I guess I should simply have been more specific. Take a stock like NFLX, for example: Though news comes out that promises competitive pressures on the company, the stock powers higher with the market, apparently as a momentum play and despite what seems an already rich market price. No doubt some probably frantic short covering was involved, but would you not see that one as in the (perhaps dangerously) overvalued category?

    Thanks as always for your comment.

  4. I rarely trade high growth stocks, simply because of the craziness after major news events, and only use them as indicators. For me they are too difficult to gauge. (ie my loss in RHT) Valuation is a very arbitrary thing. The way I try to value equities is from observed patterns, and whether the pattern makes sense via the current market psychology. (This is very very difficult to do with high growth stocks.)

    NFLX is one of the 'high-growth' stocks i keep track of, and it is one that re-confirms strength. There are very few commentators when they give an opinion I pay attention to, and try to see what they see. (I just like using my own conclusions from the raw data.) Whitney Tilson is one of those people. But when he indicated he was short NFLX, I understood his thesis, but the price action never confirmed it.

    From a macro-fundamental perspective NFLX has no real competition. Their only pseudo competition is Hulu and AAPL. But Apple TV does not provide the ease-of-use subscription model NFLX provides, and have not seen any numbers from Hulu Plus. Cable companies can crow all they want, but their offerings still suck compared to the ease-of-use of NFLX. The proof is in the pudding, and NFLX keeps justifying their worth. (The last quarter was a killer.) So until competing services become as easy-to-use as NFLX, I would not think of shorting the name. I would even argue as cable services become al-a-cart, NFLX becomes worth more. (Basically Tilson's short was hoping competition would step-up, but they didn't. So he got crushed.)

    So until competition truly challenges NFLX's model, then no, it is no over valued. (This does not mean I would trade it.)

    But NFLX is just one stock, and my previous comment was predicated on a qualitative assessment of 14 spec/high growth stocks using two specific ones as examples to get my point across. And don't forget, I use every chart in my arsenal, about 120, to gauge the psychology of the market.