Friday, June 01, 2007

Some Weekend Ideas

Another day, another record in the markets. So it goes, right?

Looking at the long-term Dow 30 chart, I frankly don't see any clear place where the push higher is going to stop, at least from a technical standpoint. We are sort of in unchartered territory. Only a sea-change in something.......a monstrous terrorist attack......a fundamental downturn in the going to make a difference.

Ken Fisher has a pretty good point where he talks about the spread between the E/P value (that's not a typo - earnings divided by price) and prevailing corporate interest rates. I'm paraphrasing, but his rationale goes something like this - the average P/E on the S&P 500 is about 17 right now, which means the E/P is akin to an interest rate of 5.8%.

However, the cost of borrowing money (for which a corporation can deduct the interest) is, once you factor the tax savings, less than 4%. So it's more economically efficient to borrow tons of cash and buy back stock. In his view, until that gap is closed, the market should continue to go higher. Assuming neither interest rates nor earnings (the "E") change, a rational value of the Dow would be at something like 18,000.

I've been battered enough over the past year to not question that kind of assumption. I'm not putting my money on it, but there's no reason to say it couldn't happen.

The American Stock Exchange's $XMI index had looked like it was going to start heading south again, but nope - it pushed to another lifetime high.

I've got a few specific stocks you might want to check out. If you think just about all the good news that can be had about Apple (the AppleTV/YouTube functionality, the forthcoming iPhone, the raging success of the iPod......) is out there and that AAPL is price for perfection, consider some puts on this high-flying stock.

Coach (COH), the purse/leather giant, also might be prone to a fall.

I like the look of Excelon (EXC) here too, for a bearish play.

For bulls, Micron (MU) seems to be turning higher after a prolonged slump. It had a really good day today, and volume has been surging over the past several months.

Those who miss the goofy videos and funny pictures will have to wait until this market gets easier for me to understand. For the time being, it's just dry charts and sober analysis.


newequity said...

First post tim. I just bought 100 DIA calls mid-day for the ride back up through all time highs. No resistance at all and we should break 14k Dow in the next 3 weeks according to my tech analysis guy.


Another comedian ??? The market will be down next week as the lack of news and merger activity will lead to some heavy profit taking...todays close will be the closing high doe 3-5 sessions


Prometheus said...

Except for the prelim reading of the GDP, we got more jobs and more production, which leaves a stronger economy. Plus, inflation seems to keep heading down, which further lowers the chance of a rate hike. I definately believe we've got a take a tumble sooner or later, but not until we get some kind of major event like Tim said. I'd love to stay pure bear, but it's been tougher than being a bull.

Vic said...

A fitting video would be the Bugs Bunny classic with the scene where three vultures are hanging out trying to decide what to do and one says- which way do we go, which way do we go?I concur with TTT that the Probability is that we see some red next week, driven by the realization that the economy is getting stronger to quickly and there is not going to be a need for a rate cut.....oh dear me!

newequity said...

You have been dead wrong on your 200% short call. I am no funny guy, just making big money every week through call options and leverage to the upside.

Andrew said...

Hey Tim, how about ERTS as a short/put. It's been downtrending and fell below a bear flag today (at least how I've drawn it). I see it potentially falling to test 42.5.


Tim Knight said...

Yep, ERTS looks pretty week - it's been generally downtrend for 26+ months now!


Newequity ...dead wrong ??? not quite QID was up today and we bought some profitable puts at the top today so dead wrong may be a week or so away ..dead even may be right ...considering you have no track record you are considered a non-event.


JakeGint said...

Sorry Tom, you said you were 200% short two days ago. Revisionism doesn't work when it's on the record. At least Tim admits when he's wrong.

BTW, Tim, I got into MU two weeks back so I concur with you on that one. Any thoughts on CREE?

ctkwtk said...

OIH & XLE, beginning to look a little ripe?

Max said...

wow, you almost sound bullish...

you realize that if you finally turn, the market will collapse, right?

that said, fight the good fight, buddy...

i don't get this market either.

Tim Knight said...

"wow, you almost sound bullish..."

There's a difference between sounding "Bullish" and sounding "Resigned."

Gary said...

Yes I think Jake caught you Tom according to your posts you've been calling a top for the last couple of days. Nobody and I mean nobody can see the future. I don't understand this obsession with trying to predict the market. It can't be done. You might make a lucky guess but it won't be and never will be a prediction. Just find an edge and trade your edge and quit listening to this silly nonsense about what is going to happen tomorrow or next week. jeezh

kapil khanna said...

I would buy APPL,COH & EXC. Technical analysis teaches us that the current trend will continue "unless" a reversal occurs.
The worst thing a trader can do is "anticipate" a reversal. Tim has been "anticipating" a reversal for a very long time. Prediciting the market is not good practice. Just let the market reverse then ride it downward.

liz & grant said...

I saw COH as having a small inverse head and shoulders (about a month) that just broke to the upside and will possibly go back and test around 53 and then we'll see.


newequity said...

tom, you have always claimed to buy puts at the top and be in the green on every trade yet the market is at new highs, go figure. I say you're full of shit man and a fat liar.

marxist said...

I love all the folks who think they have this market figured out. The "buy as much as you want, the world is your oyster" group.

There is a difference between markets that are on tear and a sound or normal market. Normal markets do not just go straight up. I know you all want to believe it, but it is about as real as a cheap toupee.

I am with Tim on this one. It will take a major event to bring things back to normal.

I know, what happens now. Folks will start throwing out stats and trend lines and all kinds of convoluted arguments as proof of the errors of my ways.

Try a little plain old common sense. Normal is a market that has dips and corrections. Normal is clearly defined by statistical models. Market patterns that are 3 - 4 standard deviations out are definitely not normal.

Normal is data free from political influence. Lastly, normal is not a market place dripping with excess cash.

Good luck to all who do not have protective hedges on their positions.

alanandcindycowart said...


Could you check out and comment on the chart of TLT over a 1 year timeframe? It looks like a huge head and shoulders that has broken the neckline. Intermediate to longer term interest rates appear to be heading upwards. This might have consequences.



Tim Knight said...

TLT looks weak, certainly, and I'd guess a year from now it would be lower as opposed to higher. But it certainly doesn't conform to any clean pattern.

John said...

You comment about E/P was interesting. But it may get better.

S&P just released an estimate of 500 earnings for the balance of this year and a first cut at 2008.

I would strongly suggest that anyone who is short to be very cautious. This year the S&P is expected to earn about $94.11 on a "bottom up basis" for a 7.3% growth rate and a p/e of 16.13.

In 2008, it is expected to earn 105.80, a p/e of 14.35 and growth of 12.40%.

Putting these numbers in my "model", the 500 "fair value" today is 2,300...and based on earnings for next year, "fair value" would be about 2,800.

I will try to spend some time this week end on this stuff. It gets quite complicated and sometimes far beyond my ability.

On more the Q' is projected to be big for the next 18 months...and the consumer is expected to come back in full force.

It sure appears that the economy is really starting to ramp up. If that's the case, what happened in China could be visiting here this summer. Imagine going from 1,500 to 2,500 over the next 6 months!!

Good Luck

John B

Dennis said...

"Putting these numbers in my "model", the 500 "fair value" today is 2,300...and based on earnings for next year, "fair value" would be about 2,800."


You must be kidding. SPX at 2300 would give you a PE of 24 and 2800 would give you a PE of 26. Those are bubble type PEs! That said, with an earning of $94.11 this year, I can see SPX at around 1700 at year end and with an earning of $105.8 next year, I can see SPX at around 2000 next year. But that is assuming that inflation is not a problem and the FED won't raise interest rate significantly.


"If you think just about all the good news that can be had about Apple (the AppleTV/YouTube functionality, the forthcoming iPhone, the raging success of the iPod......) is out there and that AAPL is price for perfection, consider some puts on this high-flying stock."


I wouldn't short AAPL because iPhone could potentially have much higher sales than even the current admittedly high expectation. Second, Apple will have more innovative products coming down the pipeline.

Gary said...

Of course a parabolic rise isn't normal. That doesn't mean that you can't make money off of them. With hindsight would you still want to short the Nasdaq in Nov. of 99. or would you prefer to stay long until Mar. 00 and then short? Bears seem to have some kind of unreasonable fear that the market will all of a sudden crash like it did in 87. Markets just don't crash out of the blue. There was actually plenty of warning in the fall of 87 before the crash.

John said...


The average P/E for the S&P since 1988 has been 23.

More importantly, the projection on earning composition, which industries will be providing more of the S&P earnings is even more bullish.

It is projected that earnings from energy as a percent of the S&P will be the lowest since 2003. (Energy companies enjoy a low p/e valuation)

The projection is that technology, telecommunications and higher growth industries will be providing the earnings. Investors normally assign a higher P/E to industries with a greater intellectual property component.

Bottom line, I don't thing a P/E of 26 is outrageous. The important thing is it appears that the economy has started to gain momentum. Things could get very profitable for bulls in the long run.

I will comment that I have no idea what the market will do next week or even Monday...but it sure appears highly probable that the market will be a lot higher over the next few years than it is today.


downosedive said...

No Gary No no no no no no Gary. Youve broken your common sense pattern. No no no no no no no. Dont make an ass of yourself, because until now youve been talking sense. DO NOT SIT THERE AND WHEEL OUT THE OLD "I CUDDUV TOLD YOU SO" IN RELATION TO THE 1987 CRASH. I WAS IN THE THICK OF, I KNOW HEART AND SOLE. EVERYBODY WAS LIKE THEY ARE NOW AND I MEAN EVERYBODY. TOTAL BULL MAKET......THEN ONE STORMY DAY THE INDICIES DROPPED 22%. In round figs 3000 points off the Dow today. It could happen this Mon, or Tues or anytime. That is what it was in 1987. So dont even think about going down that road of say it could have been predicted, because as you point out now, neither you nor anyone else can predict the timing of a fall. 22% down then and noone fucking knew the exact timing, speed or magnitude. Those that sold immediately beforehand were simply luck, thats all. Sure we can all point to the charts at that time and all the stats and say "there it is". Buts thats exactly where we are now and have been for a while depending on your preference and it aint collapsed. So none but noone knows. SO DONT TALK ABOUT 1987 LIKE IT WAS JUST A MINOR EVENT THAT WE WERE ALL TOO DUMB TO TIME BECAUSE ITS JUST THE SAME TYPE OF BULL RUN NOW, JUST DIFFERENT SETS OF DATA AND FINACIAL TOOLS AND SO CALLED ANALYSIS THATS KEEPING IT GOING THIS TIME ROUND

downosedive said...

I, or rather we, would all like to agree with your continuing predictions of a fall. But as Tim and others have said in this article and others before, unless there is an unforeseen major disaster directly knocking the USA for six, why would a fall happen next week, or the week after etc etc??? Im not talking about a little 20 point fall, but a 3% to 5% big one. I wish you were right, but the same could have been said for weeks and weeks, at least in my opinion

Gary said...

From the peak until the close on Friday Oct 16 the market had dropped 18%. On the Friday before Black Monday the market had an intraday drop of 8.3%. Oh and BTW the COT was giving a sell signal. You tell me whether the market was giving warning signs or not.

downosedive said...

Hummm. You set my memory on motion and yes I do remember there was a severe timiing issue here here in the UK. On that Friday we have the worst storm ever here in the UK. The USA markets opened at 2.30pm here, but with very few brokers trading due to the storm coupled with of course no internet trading, nothing of note took place in the UK. We were helpless as at that time futures trading was only available to the elite professionals due to the minimum contract values applied at that time. The public held shares and so on the Mon the UK opened against the background of Fridays fall. The plunge was so great and the whole UK trading system so inadequate that my brokers wouldnt even answer the phone!! They knew they wouldnt be able to trade. Then of course when the US markets opened and carried on with such a massive fall, so the UK markets plumitted even further. I think 22% was the figure. My God. I was blown away. My shares just carried on falling for years after because I had bought against tipsheets - low value tiny company junk shares. Some went bust, some were taken over at a fraction of what I payed and some raised fresh capital to survive and so diluted my holdings by 90% or more. Anyway, thanks for reminding me. BTW I had no idea COT was issuing sell signal. Interesting. Hummm. You are a mine of information!! Keep us posted, it will be interesting to see how things develop and what Tim makes of it over time

Carl said...

No comment, but a question?? I trade several of the pro fund ultra shorts, such as DXD, QID and SDS. Since the inception date of these funds, they do not havde the same percent loss as the index have gained that they track.
Thanks in advance,
Capt. Carl Rees

bmbull said...

Capt. Carl:

They should be down about twice as much as the indices are up - that's the 'ultra' part.

Gary said...

I think what Carl was refering to is that the QID is down about 39% and the Q's are up about 33%. The QID should be down 66%. I'm not sure why the ultra's are lagging.

Gary said...

I suspect it has something to do with selling futures into leading months at higher prices. But that's just a guess.

Dennis said...

"The average P/E for the S&P since 1988 has been 23."


That PE includes the bubble years and that is why I don't think the PE would be 23 this time around. But I guess only time will tell.

Gary said...

if I'm not mistaken the average trailing P/E over the last 100 years or so is about 15-17.


The market is FLAT since I went Bearish ...we went back to 100% long then back to 200% short and then we were stopped for a small loss on QID and added PUTS at the top on Friday for some gains ...we will see by Friday whether my moves were correct or wrong as of now the are about FLAT , not winning trades but not losing trades ...just want to set the record straight as my blog is delayed so we do not give out our positions until after the close .



Give the trade at least 3-5 sessions ???

Like kids going to Wally World takes a bit more time to get one of the greatest Bull Markets on earth to slow !!!


beanie11111 said...

The bears still haven't been able to muster an attack on the bulls. Bears will eventually win a small battle within the next 3 months; but don't overstay your bearhood because the bulls will come rip roaring back and deliver the final blow, that will make the bears swirl in disbelief, towards year end.

We caught the bottom on all of these stocks. They remain great investments for the intermediate to longer term:

AKAM: has bottomed.

SBUX: has bottomed.

AMGN: has bottomed at the mid 50's.

WFMI: has bottomed.

The Sound said...

Capt. Carl

The ultra short funds produce 2x inverse results on a daily basis. That is why they don't exactly mirror the index. Also, you might take a look at the mix of derivative contracts they are holding, to approximate a 2x inverse return.

John said...


According to Dr. Schiller of Yale, the average P/E for the last 50 years has been 17.43.

However, the average yield for the 30 year bond has been 7.14%.

Just to keep up with bonds, the P/E should be 25.

Mike said...

SIGM off of this base for a long position looks good if it breaks out.

Have you guys ever considered the direct approach when it comes to women ? I love the apology at the end ---

Gary said...

Did you factor in dividends into your calculations. I may be off a bit but I think dividends account for almost half of the returns on stocks over the last 100 years.
You just said it yourself "one of the greatest Bull Markets on earth". Why do you want to try and call a top during something like that? I'm not really sure if anybody in history has been able to call tops with any consistency why do you think you are different than 100 years of exceptional investors? Wouldn't it just be easier to swim with the tide instead of against it?

Gary said...

I'll make you the same offer I made Tim. I'll send you all the COT info. including an explanation of how to read it (which you may not need). I find it hard to understand why people are so determined to hold on to their beliefs especially when the market continues to tell you that you are wrong. In my opinion having an open mind and the ability to change ones position when the market disagrees with you is one of the most important qualities needed to be successful in the markets.

downosedive said...

Its not that tom or tim are or indeed me are trying to exactly call the top. Its just that no market, no matter how bullish, ever moves up every single trading session, session after session after flaming session. The longer a market fails to correct, even just by say 1% or so during the course of its upward trend, the more certain a an unpredicted fall will be and the greater the risk of that fall being much greater than the normal corrective of about 1%. Now against that background and in spite of COT, have we really any conviction that the market isnt going to fall at any time soon. Errrr, just cant cant cant keep going up every flaming day. No way. Not possible

newequity said...

There is plenty of moves down 1% to speak of in the past few months. A bull market is something where you buy pullbacks and make money. Not short everyday hoping to get out with a profit. A bear market is one that you short on any move up and we clearly are not in one right now. Just wait for the bear to arrive before getting trigger happy. You obvilously are losing money and a short in this market to complain about how the market is slowly rising everyday.

disclosure- long and 39% ytd gain

Gary said...

nose dive,
New equity said it perfectly. The mentality that this just can't continue is costing the bears a lot of money. As long as the big money is buying then every time we get a pullback these traders are buying and they have a lot of money to buy with. They don't trade on emotions like the retail crowd. They don't say "this just can't keep on going" all they know is that a pullback is a place to buy some shares cheaper than the day before.

downosedive said...

Agreed we all see the buying on every single pullback. But no way can any individual, group or corporation just keep on buying and buying and buying. It just isnt possible. Sooner or latter there has to be one or two down days, for christs sake

downosedive said...

A lusey piddley 30 point fall today and they cant even leave that alone. Its fucking ridiculous

downosedive said...

Financial news from Reuters. Today investers took comfort from.........errrr............from err, a report issued today indicating that its was a Monday and the Dow Jones soared to new closing high because of it. THAT is the fantasy that now exists. It goes up does. That is guaranteed to end in disaster, admittedly though it could be months away...................or maybe ....not

downosedive said...

Financial news from Reuters. Today investers took comfort from.........errrr............from err, a report issued today indicating that its was a Monday and the Dow Jones soared to new closing high because of it. THAT is the fantasy that now exists. It goes up does. That is guaranteed to end in disaster, admittedly though it could be months away...................or maybe ....not

newequity said...

This market is strong and has plenty of room to run nosedive. Give up the calling tops please.

Gary said...

I have all the info you need to make money in both up and down markets on my blog but because the need to be a hero and pick a top is stronger than the need to make money the bears refuse to take advantage of it...sigh.

downosedive said...

Ok, joking aside (on my part), can you help explain something. The buyers believe absolutely that the market will continue rising for the foreseeable future and to levels well inexcess of the current value. Correct? Can you tell then, why dont they just pump all theri money in right now? Why keep paying ever higher prices for the same thing, when you have millions or billions of dollars? Where is the logic? If you believe right now that something is undervalued and certain to rise considerabley, why not buy it now and be done with it? What are your thoughts specifically on this point?

downosedive said...

Come on now, you know how stubborn the die hard bears are. Unfortunately im one of them and loosing a heap of money because of it. It feels like I cant swim but everyone keeps telling me to jump in the water and i will still be alright!!

Gary said...

nose dive,
Let me ask you a question. Will you still be "alright" if the market goes up another 20%? That would equal the average last leg up in bull markets. It would also equal the smallest average increases in parabolic rises. Can you afford to fight gains like that? I'm not saying that the market will absolutely make those kind of gains but that IS the average over the last 100 years. Also no intermediate leg up has lasted less than 21 weeks so far in this bull. This leg is only 11 weeks long. Are you sure you want to fight those kind of odds?

JakeGint said...

Downdive asks:

The buyers believe absolutely that the market will continue rising for the foreseeable future and to levels well inexcess of the current value. Correct? Can you tell then, why dont they just pump all theri money in right now? Why keep paying ever higher prices for the same thing, when you have millions or billions of dollars?

Two answers :

1) Buyers are not monolithic, or even the same, day to day. Even Gary's COT levels show a balance of big trader positions. There are always more traders to add to "long" side... until there are not!

2) The "wall of worry" exists not merely in the minds of retail investors like ourselves, but in many institutions that wait, stupidly, on the sidelines. Not until these holdouts join the fray will you see and end to this maddening ratchet.

downosedive said...

No I cannot fight those odds. But why do I still feel like the world (financial that is) will collapse any day now? I dont know, it must be something so ingrained in me that stops me taking a long position, or even throwing in my short positions. Maybe i will go bull, even if only to prove/disprove a point!
jakegint I take your points, but focussing just on these big players that buy daily and keep the DJA up, I still dont see why they dont buy today, instead of paying more as each future day goes buy. Unless, of course they either do fear a market collapse or unless of course they buy daily (especially between 45 and 15 minutues before the close of every single trading session) to prop up a market that noone else buys, or that noone else has the financial resourses or willingness to risk shorting repeatedly.

Gary said...

Nose dive,
The market continues to go up as more and more sellers become buyers and as weaker hands transfer their shares to stronger hands that do not sell on every little correction.