Melancholy Bull (QQQ)

Melancholy Bull (QQQ)

 

There’s an old Lou Reed tune that offers the following bit of pithy wisdom –

 

I do believe, if you don’t like things, you leave.

What comes is better than what came before…

 

Now, forgive us if it ain’t Neitzsche or Schopenhauer, and perhaps we were young when we first imbibed the lines.  (OK, we admit we dallied now and then with a sniff of the odd petroleum based adhesive).  But we’re adamant that Lou had something sufficiently deep to offer, and it goes like this –

 

Very simply, “If you don’t like things, you leave” is excellent advice.  Unfortunately, in many cases the state apparatus doesn’t always condone the dropout option.  And at times, it even forbids it.

 

Ask the Russians of East Ukraine and the Crimea, or the Catalans or Basques or any other group of individuals that seek self-determination from the larger collective.  Heck, go and ask someone who’s trying to homeschool his kids!

 

They’ll tell you.

We’ve always advocated the ‘dropout’ route, insofar as we believe that self-sufficiency is the ideal and safest course of action for any man or family to take – particularly in these mad times, when opportunity currently abounds to gather tremendous sums via the stock market and properly allocate them before the great revolution that lies ahead.

 

Allocate them, of course, in a manner that creates a self-sufficient economic reality.  And, as usual, we’ll have more to say on that in the months ahead.

 

But at this point we want to emphasize that choosing the wealth-making option also requires you to fly solo – to chafe against the mainstream view that markets are no longer a place to create wealth, that the entire mechanism is so overheated that a manifestly cataclysmic retreat is about to occur.

 

And it will.

 

Eventually.

 

But the truth of today’s equity market, this 9th of October, 2017, is that we’re on the cusp of an upside breakout that will surprise all disbelievers.

 

And how’s that?

 

Markets are frothy by nearly all traditional standards; in that regard, the naysayers are right.  But what’s indisputable is that there’s still more buyers than sellers.

That is to say, it doesn’t matter if the patient is sick, friends.  It doesn’t matter how dire the diagnosis.  If he still has the desire to get up and dance and whorl about as if he were some carefree college kid whose wayward energies and misguided beliefs still buoy him, then dance he will.  His mood will govern his reality.

 

And it won’t be until the more responsible parties (i.e. the doctors who ‘know better’) convince him that he’s actually sick and he should darn well lie down and act like it, that he’ll cease with his silly jerk-version of the twist.

The markets are going up and will continue going up until the energy that is sending them up runs out.  And by our count, that day of exhaustion is still a ways off.

 

Have a look at the latest results from the AAII

With just over a third of Main Street investors bullish on stocks, another third bearish (32.8%) and the final third neutral (31.6%), we are decidedly not at the top of the market.  We may be on the cusp of a mild correction.  Fine.  But until we see bullish readings well north of 50%, this bull is kicking.

 

Now take a peek at what Wall Street calls its ‘Sell Side Indicator’, a contrarian metric that’s determined by the average recommended equity allocation of Wall Street’s august strategists.  When they’re overwhelmingly bullish in that allocation, it’s a negative for stocks.  When bearish, bullish.

 

Here it is –

As you can see, we have an historically average recommended allocation of 55%, neither the 70% reading that occurred in the midst of the dot.com craze, nor the bloated 67% we saw prior to the Lehman meltdown of late 2008/09 (in green).

 

In other words, if the strategists are cautious, we’ve little to fear.

 

Volatility Unwind

 

Finally, there’s been a lot of ink spilled on the subject of an enormous short position that traders have taken on volatility, the bet being that the Fed (and Treasury) will always intervene to backstop a falling market, thereby ensuring volatility is muted.  And it’s been profitable thus far.

 

But what happens when that position has to be unwound, and the volatility number spikes, will that exacerbate the actual decline in prices on the market?

 

Many believe so.

 

But we beg to differ.

 

We say the short position is a huge one, yes, and that VIX indications are incredibly low – and headed lower, possibly – and yes, that could be a cause for worry, insofar as it’s a sign of potential complacency.

 

But we’re not convinced that a massive unwind of the VIX short will be consequential.

 

The VIX is a derivative number.  And we almost never pay attention to the technicals surrounding it, as they’re only derivatives of a derivative.  The only helpful data that we’ve uncovered from movements in the VIX are those related to ‘volatility compression’, a concept that we brought to the investment world over a decade ago and that continues to bear for us fruit.

 

So, to repeat, the repurchase of short VIX futures will not have a causative effect on the price of securities.  The actual VIX number may spike, and the market may react fearfully – briefly – but nothing material will occur beyond the VIX speculative players losing their shirts.

 

And now on to business…

 

Not only do we believe that sentiment is key to addressing market direction (along with cash flows), but that basic technical analysis will also play a larger role in this stilted market, as traders increasingly come to realize that traditional Graham and Dodd investment analysis has become obsolete.

 

And with that in mind, we offer the following a chart of the NASDAQ Composite, which has struggled for two months to break above resistance (in red).

Until last week, that is.

 

Now it’s all systems go, and we believe much higher prices are in store after a test of former resistance/now support at 6480.

 

Put a healthy slab of meat on this fire, friends.  RSI readings show it’s not heated up yet.

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With kind regards,

 

Hugh L. O’Haynew

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