Tuesday, August 18, 2015

Bears Using Tight Stops Easier To Hit Than A Sitting Duck!

 Easier To Hit Than A Sitting Duck!
The markets are broken, or maybe I should use the term 'fixed" as in meaning rigged.  Nobody looks out for the small independent trader if anything a target has been painted on their back. The unholy alliance of the Federal Reserve, the government, and the too big to fail has created an interesting situation that improves their ability to wash timid and weak bears out of their positions in this manipulated market. Insider information, computer trading, and the sophisticated use of computing patterns target stops. Bears using tight stops on trades make them easier to hit than a sitting duck, and much of the market's rise has been from these stops being targeted and hit. 

Many of the bears entering positions on crazy over the top valued stocks like Netflix, Amazon, Tesla, and such do so seeking a home run and not a single. Bears tend to swing for the fences, by this I mean they are not interested in making a few dollars on a trade, but they short a stock with the intention of holding onto to it until it burst into flames, and crashes to the ground. Bears often go into a trade hoping or thinking the top has been put in or little upside remains and protecting the trade with a stop. They understand that money growth worldwide has not resulted in rapid economic growth, but rather a sea of money on which current valuations float. It is only prudent we question the true relevant value, but timing a market top is very difficult especially so when those in charge continually intervene and do anything they can to extend and pretend the current market.

To say the market is rigged is an understatement. After over 30 years of trading commodities, I will flat out state without any reservations that lies and manipulation run rampant. Over the years we have witnessed the type of market reversal the big banks supported by the Fed can generate with a concerted effort to buy S&P 500 index futures at crucial support points. This has proved more than enough to turn the markets from red to green in the blink of an eye. This has reinforced a "buy the dip" mantra or style or trading that has up until now been rather successful. However, the bottom-line is that the higher the market goes the more vulnerable it becomes to a final major collapse and sudden downward move from which it will not rapidly recover.

With all this in mind, it is easy to understand why the bears, in particular, are jumpy.  Over the last several years a pattern of random statements from the Fed and several other sources have caused crazy and illogical rallies. It seems even a bad report on job creation is twisted and spun as to mean more Federal Reserve support for easy money policies and a reason to rally the market. It seems no suggestion of weakness no matter how subtle can exist because it may begin to unravel the already fragile consumer confidence. Efforts to escape our economic morass will continue and most likely take an interesting route going forward. Now and then warning and words of caution are issued from institutions such as the BIS, IMF, and World Bank, but within hours someone comes out recanting or spinning the words into something not so dire and sometimes even optimistic.
Looking back few bears thought the end of QE would be a reason for the market to rally, but it did. Note; this is the reason I caution bears to hold back on their celebrations. While those in power, the politicians, central bankers, and those on Wall Street appear to have painted themselves into a corner more than once, it seems they have super powers that allow the constant creation of new exits. Do not be surprised if they have a few more tricks up their sleeve. Until now printing more money has driven this market, an explosion in carry trades, and the growing number of stock buy backs. Last month I wrote that a lack of short positions will bode poorly for the market if it falls rapidly because in such a situation as shorts take profit and buyback their positions they act as a floor under the market giving it support. In this distorted market, we may find the floor is very weak or only an illusion.

I continue to witnessing efforts to justify high stock evaluations that discount the importance of profitability and elevate things like market momentum. I consider this a dangerous situation. When stocks like Amazon that are trading at an astronomical P/E then miss earnings or actually lose money, it is hard to explain why stocks prices reverse after a sharp drop then close the next day posting huge gains. Recently, we have witnessed massive moves in several speculative stocks such as Tesla and Netflix that are hard to defend by any other reasoning than shorts being squeezed out of the market. May I suggest the market has become so distorted it no longer reflects reality and that those with short positions rushing to the exits are responsible for most of the price action now taking place.

The bottom-line is the higher the market goes the more vulnerable it becomes to a major collapse and sudden downward move. For a long time, the wisdom has been to buy market dips and pullbacks. With each new rally, I feel a bit of deja vu. Way back in 2007 we saw stocks often ignoring both the news and reality, this is happening again. I awoke yesterday to several articles on how Morgan Stanley raised its price target on Tesla shares by 66% to $465 from $280 because the company is uniquely positioned to dominate in the emerging world of autonomous technology and driving. Yes, if it looks like a Ponzi scheme, sounds like a Ponzi scheme, and feels like a Ponzi scheme, then it is probably a Ponzi scheme. Still, it would be wise for those who see this for what it is not to make themselves an easy target.

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