Further Confirmation/Dow Theory/VIX
The market continues to rock higher. One commentator said it's the best market he's ever seen in 25 years and this particular guy is sharp as they come. Who's to argue? Since the last post on the blog a week ago, the large cap index has made multi year highs in 5 of the 6 days. The small cap index has pushed past it's May 2006 high to a new record as well. All in all, virtually every stock market indicator is healthy.
A seemingly obsolete indicator is the Dow Theory and that too has confirmed the rally. This point was made last week and I promised to revisit it. The Dow Theory is based upon the reasonable principle that if the companies that make the goods and services are selling more of their products then the companies that ship the product (or the people offering the services) should be doing more shipping. It's logical and generally gives a good signal on a longer term basis. Since no one talks about this anymore and it still makes sense I'm keeping an eye on it. The Transports made a new all time high a year ago and peaked this spring while the Industrials did not make a new all time high till this fall. The Industrials weren't acting badly, they were just taking their time and that's ok. Now that the Industrials have made a new high, we need the Transports to step ahead to keep the good vibe going. So far this indicator tells us we are ok.
One point of worry is the VIX. This is a measure of stock market volatility and it's trading at more than a 10 year low. The question is how this "off the charts" low affects the market or how it matters. I can offer an idea of what it means. There are presently over 8,000 hedge funds trading in the markets daily. Some are outstanding, many are good, but most will not be able to beat their benchmark or achieve their objective after their 1&20 fee is accounted for. In the mean time, these funds are starved for performance and they have the research capabilities to find the opportunities that exist. This is mostly because they use the same computers, services, algorithms, and brokers so that they end up neutralizing eachother. Picture them in a circle shooting at eachother as each buys the "idea of the day" and shorts the "short of the day" and arbs the "arb of the day". What's happening is a near immediate elimination of opportunity that may be translated into a narrowing of volatility. You can buy stock in NY and short it in London and lock in a spread after brokerage, money and currency? They all see it and it disappears in seconds. This happens constantly and like any mature system, the variation is being ground away. (Sort of the same reason why there are no .400 hitters in baseball anymore.) The hedge fund industry has had an impact that was not expected but it is creating unique opportunities.
Take a stock like GOOG. I happen to be long the stock but there are many like it - pricey relative to all benchmarks and indicators. So it's a short to the hedge fund community. It gets pricier and they short more, ad infinitum. But what's not being counted on is a steady stream of good business news from the company. That empowers the natural longs who buy and, driving the stock higher, force the hedgies to cover their growing losses and at the same time emboldens other hedgies to short this expensive stock and it starts the viscious cycle all over. All that new shorting is also absorbed by the market and simply becomes buying power waiting for the viscious cycle to grind them out. Of course, at some point GOOG will break and the last shorts will be brilliant and then the stock will tank quickly. But until that time I predict that moves will be more sensational in this market for these reasons. Note that nothing has changed in the market - human emotion is still the same - but the the speed and size of the game is faster and larger. All this spurting and tanking on a macro basis is neutralizing volatility but there is plenty of individual opportunity available from stock to stock. As a fear gauge, VIX says there is almost no fear (which would be a bearish indicator right now) and there are various ideas about that which we will revisit at a later date. However, market protection is getting cheaper and cheaper. Unfortunately not all are sophisticated enough to do anyting about it but it's an interesting point to note. I am not saying that downside protection should be bought (and some types of investors can't even do so) but it is worth noting how cheap it is.
As always, please visit our website for further information about our firm, philosophy, and investment strategies/results. www.gellercapital.com
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Geller Capital Management, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.
A seemingly obsolete indicator is the Dow Theory and that too has confirmed the rally. This point was made last week and I promised to revisit it. The Dow Theory is based upon the reasonable principle that if the companies that make the goods and services are selling more of their products then the companies that ship the product (or the people offering the services) should be doing more shipping. It's logical and generally gives a good signal on a longer term basis. Since no one talks about this anymore and it still makes sense I'm keeping an eye on it. The Transports made a new all time high a year ago and peaked this spring while the Industrials did not make a new all time high till this fall. The Industrials weren't acting badly, they were just taking their time and that's ok. Now that the Industrials have made a new high, we need the Transports to step ahead to keep the good vibe going. So far this indicator tells us we are ok.
One point of worry is the VIX. This is a measure of stock market volatility and it's trading at more than a 10 year low. The question is how this "off the charts" low affects the market or how it matters. I can offer an idea of what it means. There are presently over 8,000 hedge funds trading in the markets daily. Some are outstanding, many are good, but most will not be able to beat their benchmark or achieve their objective after their 1&20 fee is accounted for. In the mean time, these funds are starved for performance and they have the research capabilities to find the opportunities that exist. This is mostly because they use the same computers, services, algorithms, and brokers so that they end up neutralizing eachother. Picture them in a circle shooting at eachother as each buys the "idea of the day" and shorts the "short of the day" and arbs the "arb of the day". What's happening is a near immediate elimination of opportunity that may be translated into a narrowing of volatility. You can buy stock in NY and short it in London and lock in a spread after brokerage, money and currency? They all see it and it disappears in seconds. This happens constantly and like any mature system, the variation is being ground away. (Sort of the same reason why there are no .400 hitters in baseball anymore.) The hedge fund industry has had an impact that was not expected but it is creating unique opportunities.
Take a stock like GOOG. I happen to be long the stock but there are many like it - pricey relative to all benchmarks and indicators. So it's a short to the hedge fund community. It gets pricier and they short more, ad infinitum. But what's not being counted on is a steady stream of good business news from the company. That empowers the natural longs who buy and, driving the stock higher, force the hedgies to cover their growing losses and at the same time emboldens other hedgies to short this expensive stock and it starts the viscious cycle all over. All that new shorting is also absorbed by the market and simply becomes buying power waiting for the viscious cycle to grind them out. Of course, at some point GOOG will break and the last shorts will be brilliant and then the stock will tank quickly. But until that time I predict that moves will be more sensational in this market for these reasons. Note that nothing has changed in the market - human emotion is still the same - but the the speed and size of the game is faster and larger. All this spurting and tanking on a macro basis is neutralizing volatility but there is plenty of individual opportunity available from stock to stock. As a fear gauge, VIX says there is almost no fear (which would be a bearish indicator right now) and there are various ideas about that which we will revisit at a later date. However, market protection is getting cheaper and cheaper. Unfortunately not all are sophisticated enough to do anyting about it but it's an interesting point to note. I am not saying that downside protection should be bought (and some types of investors can't even do so) but it is worth noting how cheap it is.
As always, please visit our website for further information about our firm, philosophy, and investment strategies/results. www.gellercapital.com
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Geller Capital Management, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.
posted by David Geller at 5:56 PM
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