Just a brief post to make a couple of obvious points - why bother you might ask? First, what's obvious to some might not be to others - so feel free to debate the validity of the statements. Second, it's always a good idea to have a look at the mile markers as you drive along... and this market has passed a few in the last month.
Global equity markets have rallied since the end of last year leaving many participants on the sidelines. It's been notable that this has, on balance, been a low volume rally with commodities left behind while the materials sector (companies) have joined in the rally. Low interest rates, increasing access to capital (both debt and equity, and M & A activity) could justify the divergence.
Managers booking gains have found a strong market, and they have been incentivized to continue to hunt for bargains. With a very average earnings season, bargains have become harder to find and the indexes stabilized towards the end of January, before continuing to trend upwards. This latest move up is now showing signs of exhaustion with markets failing to string together daily gains. While there are other signs of exhaustion it's worth noting that long term US government debt has recently traded down; also worth noting its very high volatility further supporting the "exhaustion argument".
Psychologically, bullish managers have been blessed with good performance this year, and an increasing IPO pipeline (leading to excitement, discounts and fees in all the "right" places), but now they are faced with having to "pay up" to maintain their market exposures - which quickly leads to a feeling of "chasing the market". To conclude this brief market analysis, a contrarian perspective can account for the flattening of the short term trend at the end of January, while basic human greed probably accounts for last week's continuing moves higher (as managers started to worry more about "missing out" than "chasing the market").
So, we're overbought again! Getting all the indicators to tell us that we're overbought and still seeing markets trend higher is a sign of a bull market, but the highest probability trade now is consolidation. Reflecting on the nature of secular bear markets, it's also a good idea to keep in mind that while we take the "stairs" up we like taking the "elevator" down!
Now for the options' reminder/primer. Consider selecting issues that have shown solid strength, but which are not - under any circumstances - takeover candidates. Sell a straddle (put and option) for a combined premium that gives a nice technical entry price for the underlying. Technicals for most issues should now provide good short term support in a deteriorating market, and global headline risks ought to prevent an outright bull rush. It may be tempting to have a look at ETFs (mostly to develop strategic industry/sector/country exposure while avoiding the risk of being bankrupted by a takeover), but please view ETF technicals with a high degree of scepticism.
No comments:
Post a Comment