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US Stocks: Short This Market With Care


Enjoy the "short" ride if stocks hit an air pocket, but don't forget that corporate treasurers with very deep pockets are ready, willing, and able to spoil the bears' party.

Soooo…. the drumbeat of "the end is nigh" is growing louder, with the likes of Carl Icahn, Prince Al-Waleed bin Talal, and even the more "out of the limelight" Jeremy Grantham suggesting that the market could be in for a beating. Far be it for me to argue with their balance sheets, but based on the indicators I've highlighted in the past, and that have served me well since 2009, the underpinning of the bull move of the last four years -- the corporate bond market -- is about as solid as it has been during that period, and by all indications, is actually getting even better. Since I submit to Minyanville's Buzz & Banter on a regular basis and with some detail on corporate bonds and derivatives, for this article I'll support my assertion with just a couple of data points: $37.7 billion of new bonds sold so far this week, and $115 billion MTD; 2-year swap rates are at 10.25bps and stabbing regularly into the single digits.

Bears can take solace in the fact that on a daily basis, the S&P 500 (INDEXSP:.INX) -- note that I use the S&P Futures Pit contract as the proxy -- has printed a Sequential Combo Countdown Sell, and as of last night, it put in a bearish "Price Flip." If you are inclined to take action on this signal, consider that the "Risk Level" is at 1802.40. More encouraging for the bears is the weekly TD Sell Setup in force for the last two weeks. However, for this signal to prove itself, the weekly price pattern needs to print its own "Price Flip," and that must happen within the next two weeks. Otherwise, the action post TD Sell Setup will look more like "the pause that refreshes" than "the beginning of the end." (If you are not familiar with DeMark indicators, my article Interpreting DeMark Indicators explains enough to allow you to follow along.)

Similarly, traditional charts show many overbought conditions, but pattern-wise, it's worth highlighting that the drop of the last few days has just brought us back to the level from where the SPA PIT broke out of a major multimonth channel. This kind of retracement is not only to be expected, it's what a bull wants to see.

What does worry me some, are the moves in some of the mo-mo names, a number of which reached flat-out stupid levels. But the likes of 3D Systems (NYSE:DDD) and Voxeljet (NYSE:VJET) are coming back to Earth hard and fast (see Space Oddity, subscription to Buzz & Banter required). And for every stock gone bonkers, I can find a BioMarin (NASDAQ:BMRN), a SanDisk (NASDAQ:SNDK), a General Electric (NYSE:GE) or a Qualcomm (NASDAQ:QCOM) that beg to be bought. Even a recent hot IPO like Container Store (NYSE:TCS) is worth a nibble if it gets caught up in the downdraft.

The bottom line is, there have been nasty corrections in the last four years, and every single one proved to be a buying opportunity once companies get sick of watching their stocks fall, and use their cash hoards and debt to prop up their tickers. The fuel for this dynamic is corporate bond sales, and despite the headline risk, higher rates will likely draw even more money into corporate bonds as buyers chase yields. Hence, the reservoir for future buybacks is getting deeper by the day. So enjoy the "short" ride if stocks hit an air pocket, but don't forget that corporate treasurers with very deep pockets are ready, willing, and able to spoil the bears' party.

Twitter: @FZucchi
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Positions in GE, BMRN, SNDK, QCOM, and TCS
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