There are different strokes for different folks, and where you stand is a function of where you sit.
Throughout my 23-year career, I've found that trades and investments can be viewed through the lens of four primary metrics: Fundamental Analysis, Structural Analysis, Technical Analysis, and Psychology.
Distinct in approach and unique in analysis, they are akin to four legs under a table; the sturdier and more balanced those legs are, the higher the likelihood that money will be made if the risk profile mirrors the time horizon.
I will review all four metrics today.
After the breakout on Turnaround Tuesday through S&P (INDEXSP:.INX) 1850, technicians have cast an eye toward S&P 1960, where the pattern "works" in a technical vacuum.
The Russell 2000 (INDEXRUSSELL:RUT) confirmed that acne with a move through RUT 1182, while the banks and transports are trying to do the same with measured moves through BKX (INDEXSP:BKX) 71.50 and TRAN (INDEXDJX:DJT) 7600, respectively (both traded through those levels on Friday but couldn't close above them).
The biotech sector, for its part, led the market higher and subsequently broke down on Friday through IBB (NASDAQ:IBB) 260, which is newfound resistance as we enter this week.
FactSet issued an earnings roundup last week and arrived at the following conclusions:
- Seventy-one percent of companies beat earnings estimates, slightly below the 73% four-year average.
- Blended Q4 earnings growth is 8.5%.
- Eight of 10 sectors are growing earnings.
- Sixty-three percent of companies beat sales estimates, slightly above 59% four-year average.
- Q1 guidance is lousy, with just 17 of 101 companies issuing positive guidance.
- Estimated earnings growth for Q1 is 0.7%, down from 4.5% on December 31, 2013.
- Current 12-month forward P/E ratio is 15.3, above five-year average (13.1) and 10-year average (13.0).
The Fed continues to taper and has offered no indication that it will stop, short of the fail-safe "data-dependent" language that Fed officials are keeping in their back pockets.
The FOMC views any change in the pace of tapering as a "strong" signal to the market, only to be used in times of emergency. Having seen cumulative growth in employment since the third round of asset purchases began, it is taking steps to extricate itself from the market and shift back to its traditional focus on interest rates.
Recent developments in interest rate markets show signs that market participants may have fully discounted the Fed's policies of forward guidance, providing something that resembles "free-market" prices in the long end. Pause to let that sink in.
China remains a structural concern as the government attempts to manipulate its economy toward self-sustaining underpinnings. Given the massive credit growth, authorities are taking steps to curb credit growth at the real estate, corporate, and consumer levels. The equity markets have reflected those developments; the Shanghai Composite (SHA:000001) closed below 2,000 on Monday, near five-year lows.
Finally, the tensions in Ukraine have the potential to disrupt structural underpinnings in natural gas and trade relations and need to be respected in kind.
Psychology is the most amorphous metric, but it's the most important; perception is reality in the marketplace. As it stands, there are swatches of this tape that trade like a hyperactive five-year-old.
While there have been ample reasons for concern -- China, Ukraine, the specter of less synthetic stimulus, to name a few -- there has been a defiant resistance to negative headlines -- not just recently but for quite some time.
Traders are conditioned to buy the dip -- scratch that, they've been conditioned to get in front of the dip, blunting the pullbacks altogether. As a result, there is an entire generation of stock traders who don't know what a down tape is.
There are a few ways to measure the mood, including sentiment surveys, such as the chart below which is courtesy of Doug Kass.
We also noted why it has paid to pay attention to the current level in the VXO (INDEXCBOE:VXO).
There have been anecdotal eye-poppers as well, such as massive moves on mistaken catalysts. This is classic "late in the game" sorta stuff.
And of course, there is the price action in highfliers as the vehicles for performance anxiety.
This is the analog where Chipolte Mexican (NYSE:CMG), Yelp (NASDAQ:YELP), Netflix (NASDAQ:NFLX), Priceline (NASDAQ:PCLN), and Tesla (NASDAQ:TSLA) could be Ariba (NASDAQ:ARBA), Infospace, JDS Uniphase (NASDAQ:JDSU), Veritas, and Verisign (NASDAQ:VRSN) circa Y2K.
I will remind you of The Three Phases of Leave, an oldie but goodie as it pertains to the psychological continuum in the market, across numerous time horizons. See if you can guess where we are now.
There was incessant chatter on Friday of a "reverse allocation in the marketplace," out of stocks and into bonds. If that was true, the underlying bid in equities was all the more impressive and supported the "sector rotation vs. outright migration" theme.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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