Thursday, January 12, 2012

Other Important Indicators

As I suspected, this rally seems to have been fueled by short covering. Short interest as of Dec 30 had plummeted to the lowest level since Spring 2011, which was a significant market top. The short interest in the $28 billion NASDAQ ETF (QQQ), normally an important hedging tool, has fallen to an 11 year low as of the end of year. The massive $100 billion S&P 500 ETF (SPY) saw a 33% drop in short interest during the last two weeks of the year.

Shorts have been squeezed out of their positions as sentiment has become wildly positive. This week, AAII sentiment increased slightly to the highest level since February 2011. After that instance of exuberant sentiment, the market was never able to rise by more than 20 points. 

This is happening in the face of deteriorating leading indicators. (Even though lagging indicators are still improving.) For example, the Baltic Dry Index (BDI), a measure of shipping costs for dry bulk cargoes, has broken through its August low. The BDI was a great leading indicator when it peaked in October 2007 (at a level that it has never regained, because of a glut of ships.) Also, Rosenberg points out that the strength in Treasury bond prices is another non-confirmation of economic strength, as the yield on the 10-year note is once again below two percent.

17 comments:

C. Fischer said...

This market has gone full retard. When bad news gets ignored completely, I get out.

C. Fischer said...

I was 75% long until this week. I'm 25% long now.

CP said...

That seems like a good idea.

What were you long?

Nexuiz said...

We all know the mantra "Never short a dull market". It's the only thing stopping me from going short tomorrow for the long week-end. Actually, it's because I'm not sure if the market is dull or just eerily quiet before a storm.

CP said...

Define "dull"?

eahilf said...

Define "dull"?

Normally it's a market trading within a range or channel, headed gradually up or down, but at any time this channel can be broken by a gap up or down, although follow through is always important.

Calling this market dull or boring is not so appropriate.

It's the only thing stopping me from going short tomorrow for the long week-end.

At the moment price action does not justify significant short exposure. Not at all. Intraday action is generally and consistently bullish -- dips are bought (as are gap down opens).

So there's a trade that's working now: dip-buying intraday. And like any strategy...it'll work until it doesn't.

C. Fischer said...

Sold MSFT, DELL, and BP. MSFT and BP were bought a while back, DELL recently. Still holding some BRK that I bought when it was below 70.

Hoping the market tanks because I want to purchase CHK 2014 calls.

CP said...

I think MSFT and DELL are value traps.

CHK 2014C are a good idea though.

The preferred is probably better though.

C. Fischer said...

With MSFT and DELL, it depends on the timeframe. Neither are growth companies anymore, without a doubt, but they are big cash cows and trading very cheapily (Dell at 5x FCF net of cash?) With MSFT, I got in an an attract price (24) and sold calls and puts against it (22.5/26.) Same strategy with Dell, although I want to get back in around 14 for a better margin of safety.

I looked at the CHK PRD, I think it is overpriced. I think the company itself is enormously undervalued and the natural gas is going to be much higher going forward (which when we look back 2-3 years, will be "obvious" because of the difference between the price of oil and gas). But I don't see the upside - at $92 for the PRD, the yield spread between the preferred and the common is only 3%, and the conversion price is almost double the current price.

CHK has sold preferred in private placements last May at a 5.75% with a conversion price of $27(http://www.chk.com/Investors/Documents/Preferred.pdf ). I would love a piece of that, but that implies to me that their publicly traded PRD is overpriced.

CP said...

The CHK pref trades at 80 to yield 6.25%, and conversion parity (the correct way to think about it) is now ~$30/share.

C. Fischer said...

Where are you seeing $80? I have $91.66? ( http://www.marketwatch.com//investing/stock/CHK.PD ) At $80 I like it a lot more.

C. Fischer said...

Also, even at $80, 80/2.277 = ~35 a share, right?

CP said...

There are a number of prefs - you are looking at the wrong one.

C. Fischer said...

Could you help a reader out by pointing me at the right one?

CP said...

http://www.otcmarkets.com/stock/chkdg/quote

Traded below 80 today.

http://www.chk.com/Investors/Documents/Preferred.pdf

The strike is 38.81 so parity is 31.

C. Fischer said...

Good man, thank you.

Let me ask a dumb question - why would anyone purchase the CHKPRD issue? Is there any differences?

We all know markets are perfectly efficient so it would not be possible for two of the same securities to be priced so differently (I'm being wildly sarcastic..)

CP said...

I'm not sure - "a fool and his money", etc.