The Big Wave Trading Portfolio is now under a strong SELL signal following the Nasdaq and Russell 200 breaking down below the 50 day moving average on strong volume. This SELL signal is stronger than any previous SELL signal we have received in our model since the one issued in October 2012. Somehow, miraculously, the market managed to find a low volume low in November and we have been in an uptrend ever since. That is until this year.
On January 24th we had our first crack on extremely strong volume where leading stocks finally showed extreme Relative Strength weakness compared to the market. Before this happened, leading stocks already were showing RS weakness compared to the market and for the first time since the rally really got underway in 2013 they did not lead when we began to rally back to new highs in February.
For the first time, the leading stocks became stocks in defensive industries like Utilities and REITs. Now that the market is weakening again these continue to lead, along with other bear market leading sectors Food, Aerospace/Defense, and Energy. These are not the sectors you want to see leading if you want the market to hit new highs in the short-term. You obviously want to see leading industry groups rotate into other leading industry groups. We are definitely not seeing that this time around.
In fact, we are seeing them get punished severely. Cloud computing, Biotech, Solar, Social Networking, and 3D-Printing stocks are all getting hammered. None of these sectors are holding up and all are selling off on very heavy volume. No stock is being left behind. The only stocks not being left behind are those defensive stocks.
Which now brings me up to this. This entire uptrend from the 2008 lows has been insane. This entire rally has had some to do with corporation bringing to market amazing products but we all know the real reason this market is up near all-time highs and that reason is QE. Without QE, there is no way in hell we would be here. In fact, if anything, QE has made the current environment the most dangerous ever for investors. Asset prices have been inflated due to low rates and funny money. Without this, I am sure the 2008 downtrend would have longer, more painful, yet would have led to a real economic recovery rally. However, it didn’t happen so here is where we are.
We are now in a market where investor bearish sentiment on the Investors’s Intelligence survey is at a point not seen since before the October 1987 crash. The VIX, despite the market being below the recent February/March levels, is lower than where it was during our last pullback. This clearly shows that investors are complacent and think that stocks are safe to continue to buy here despite the recent selling. Definitely concerning.
However, that is not as concerning as the issue of the Fed. We have a Federal Reserve that has made it clear raising interest rates will be there on their agenda. On top of that, tapering is in effect in the tune of $10 billion per month. So the one thing that helped keep this market afloat for over five years is going to be systematically taken away. Treasury markets already see this coming and that is why we see rates rising on the long-end.
Other problems that have started to arise that I noticed in 2000 and 2007 include IPOs coming to market that have no business coming to market. We recently saw CSLT and KING prove to the market that the time has passed to make quick big gains in “hot” companies with questionable fundamentals. And we still have many more coming with BOX coming out shortly. When you see IPOs of this quality start to flood the market, you know banksters are just flooding the market with terrible merchandise while they can. The door is quickly closing shut to get these deals to market. This happened in 2000 and 2007 and here we are again. No lessons have been learned but that is the point of the game.
Then we have the crazy action we saw the past week with Facebook buying Oculus VR company. This news sent OCLS and OVTZ two stocks with the name Oculus in it ripping higher. This happened in Twitter’s IPO (TWTRQ), Google’s NEST acquisition (NEST), and now Facebook’s Oculus purchase (OCLS & OVZT). See a pattern. This is not a market driven by real fundamentals. It has become a speculative joke.
Getting back to debt, distressed debt is exponentially climbing, articles about taking out a second mortgage to buy stocks, and the fear in the RE rental market in SF and NYC brings to mind the fear that RE renters faced in 2005-2007 before the bubble burst. So there are other signs outside of the actual stock market that suggest something is brewing.
Now while all of these problems in our economy have been apparent for a while it is just now starting to really pick up steam we had price hitting new highs and leading stocks leading us higher. Now we still have all of these problems and this time around we have no leaders to help us off the floor. At least not yet and that is exactly the problem.
The biggest problem in reality is that no matter which way you slice it (price-to-sales, price-to-earnings, sales-to-earnings, etc…) this market is one of the most expensive ever following the Q1 earnings season. Only 1929 and 2000 saw a more expensive market. Let that soak in for a little while.
We have reduced our long positions to minimal holdings in the 20 or so remaining long positions, we are very heavy in cash, and have started to put on large leveraged short positions. If the market continues to sell off, we have no fear in increasing our leveraged short positions based on the empirical mathematical evidence that a significant shift is occurring. If we are proven wrong via price, you can be 100% sure we will not marry our analysis and will buy the leading stocks moving higher. Hell, we have taken 3 new long positions in Oil stocks and all of them are working. So we are not biased to any side here. However, we can not deny what the math is telling us about the possible future of this market based on an extensive historical backtesting of data.
The bottom line is that if you are still very bullish going into Monday you better start hedging your bets. The table and odds are quickly shifting to the side of the bear camp. Good luck everyone and have a wonderful upcoming week. Alooooooha!!
TOP CURRENT HOLDINGS – PERCENT GAIN SINCE SIGNAL DATE – DATE OF SIGNAL
CAMP long – 372% – 4/26/12
VIPS long – 285% – 7/17/13
POWR long – 268% – 12/11/12
WAGE long – 202% – 1/8/13
HEES long – 222% – 9/4/12
AER long – 140% – 6/27/13
FLDM long – 109% – 8/28/13
WDC long – 104% – 1/9/13
LOCK long – 71% – 5/20/13
CLFD long – 68% – 9/24/13
V long – 65% – 8/31/12
USCR long – 58% – 4/12/13
JAZZ long – 47% – 10/22/13
TPL long – 46% – 10/22/13
ICLR long – 43% – 4/30/13
ARC long – 36% – 10/16/13
GMED long – 34% – 11/26/13
INO long – 32% – 12/23/13
JBT long – 27% – 9/11/13
