New Highs/Unusual Volatility/What’s Next?
Today was another big day in the U.S. stock market. The NYSE composite closed at a new high on a volume surge – exactly the type of action that an investor wants to see. The NASDAQ soared even more and closed at a new 7 year high. More to the point, the stocks that GCM holds in its models jumped again, outperforming the market handily. Its hard not to be bullish right now from where I sit. My gut says we are poised to go higher but other parts of me are questioning the sanity of such a perspective.
In fact, there has been much to be concerned with over the last 2 ½ months as the market surged. Perhaps most troubling has been the series of negative divergences that have developed among key technical indicators. While the above indices are making new highs, the advance decline line has not. To the contrary, the line is below the October 12th level when the market was at the last new high and it is even further below the July 16th level when the market was at the last new high before the subprime mortgage meltdown. This suggests that the average stock is not moving higher and the pizzazz in the indices is due to the gains of a select group of stocks. As leadership narrows, a bull market is threatened.
Volume flows are out of sync on the NYSE and the NASDAQ. During the summer rally, volume was not overwhelming but it generally ebbed and flowed with the market. After the volume surge during the ensuing summer selloff, the market rose on noticeably lower volume. The lowest volume was about 3 weeks ago, at the last peak suggesting weak demand at higher prices. Then, as the market dipped in later October, volume picked up suggesting sellers were getting aggressive. As the market rose during the last week volume ebbed again – a buyers strike? Volume is the weapon of the bull and should rise with rallies (aggressive buyers) and fall on declines (an absence of buyers/weak selling). Since just the opposite has been happening, we have yet another negative divergence.
Finally, the new high/low list has been anemic. The 10 day moving average of new highs to lows has been deteriorating. As the market has just “broken out” one would expect a surge in new highs, perhaps 500 or more a day, not the 150 or so we have been seeing on average. Other factors are more subjective – tremendous volatility on a day to day basis in select “hot” stocks as well as the WCG debacle. Lots of anxiety over interest rates, credit, the China bubble, to name a few.
Yet, the indices feel like they are going higher and a breakout could carry us 15% quickly, maybe by year end or early February 2008. Ultimately we buy and sell prices, not volume or new highs or breadth. So we should respect the price action the most.
So what’s a portfolio manager to do? For me, the answer became simple – raise more cash. If the market breaks out, our list of winners (RIMM, PCU, MTW, AMX, STRA, etc.) will likely do more than their share of the lifting. If necessary we can add to existing positions or take on new ones – there is no dearth of ideas in this shop right now. But, if the negative divergences cause this potential rally to fade, that cash will help us grind through that period and make better decisions near the low. In other words, it will be better being more on the outside wishing we were in rather than being more on the inside wishing we were out.
We will continue to monitor the markets closely and hopefully continue to add meaningful gains to the already excellent year we are having. Stay tuned!
In fact, there has been much to be concerned with over the last 2 ½ months as the market surged. Perhaps most troubling has been the series of negative divergences that have developed among key technical indicators. While the above indices are making new highs, the advance decline line has not. To the contrary, the line is below the October 12th level when the market was at the last new high and it is even further below the July 16th level when the market was at the last new high before the subprime mortgage meltdown. This suggests that the average stock is not moving higher and the pizzazz in the indices is due to the gains of a select group of stocks. As leadership narrows, a bull market is threatened.
Volume flows are out of sync on the NYSE and the NASDAQ. During the summer rally, volume was not overwhelming but it generally ebbed and flowed with the market. After the volume surge during the ensuing summer selloff, the market rose on noticeably lower volume. The lowest volume was about 3 weeks ago, at the last peak suggesting weak demand at higher prices. Then, as the market dipped in later October, volume picked up suggesting sellers were getting aggressive. As the market rose during the last week volume ebbed again – a buyers strike? Volume is the weapon of the bull and should rise with rallies (aggressive buyers) and fall on declines (an absence of buyers/weak selling). Since just the opposite has been happening, we have yet another negative divergence.
Finally, the new high/low list has been anemic. The 10 day moving average of new highs to lows has been deteriorating. As the market has just “broken out” one would expect a surge in new highs, perhaps 500 or more a day, not the 150 or so we have been seeing on average. Other factors are more subjective – tremendous volatility on a day to day basis in select “hot” stocks as well as the WCG debacle. Lots of anxiety over interest rates, credit, the China bubble, to name a few.
Yet, the indices feel like they are going higher and a breakout could carry us 15% quickly, maybe by year end or early February 2008. Ultimately we buy and sell prices, not volume or new highs or breadth. So we should respect the price action the most.
So what’s a portfolio manager to do? For me, the answer became simple – raise more cash. If the market breaks out, our list of winners (RIMM, PCU, MTW, AMX, STRA, etc.) will likely do more than their share of the lifting. If necessary we can add to existing positions or take on new ones – there is no dearth of ideas in this shop right now. But, if the negative divergences cause this potential rally to fade, that cash will help us grind through that period and make better decisions near the low. In other words, it will be better being more on the outside wishing we were in rather than being more on the inside wishing we were out.
We will continue to monitor the markets closely and hopefully continue to add meaningful gains to the already excellent year we are having. Stay tuned!
posted by David Geller at 10:38 PM
0 Comments:
Post a Comment
<< Home