Danger Ahead

The market continues to be under pressure; the SP500 closed down 2.57%, -8.5% for the year and down 11.6% since its high on 7/20/15.  The biotech sector (XBI) which at one point was the best performing sector (+45%) for the year is now down year to date and in full liquidation mode.

The market is getting oversold here short term. Currently, we only have 13% of stocks above their 40-day moving average, a level where the market has tended to bounce from.  However, if the current scenario plays out like 2011 which so far it has, we then have to be on the look out for another flush. In 2011 stocks above their 40-day moving average got as low as 2%.

We also saw a spike in stocks down 4% or more for the day, spikes have led to short-term bounces, you have to very careful leaning short after big sell-offs.

But, the big news of the day was and is Carl Icahn's market comment in which he warns of a potential looming catastrophe. Carl said he's "more hedged now than I've been in years.  That comment will be followed by a video titled "Danger Ahead" that will be released tonight at midnight. What's interesting is that Carl just took an 8.5% stake in FCX, bought more of his biggest losers CVR, CHK, and RIG.  The bearish bloggers are going to have a field day with what Icahn said today, ("billionaire investor is more bearish than he was in 2008 when the market plunged 50%").  Whatever. In 2011, Ichan gave his clients all their money back because he was also concern about a big correction. “Given the rapid market run-up over the past two years and our ongoing concerns about economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis.”  

Like everyone else, Carl is going to get some right, and he will get some wrong.  Fine-tuning your entire portfolio based on his comments, definitely wrong.

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fzorrilla@zorcapital.com   @Zortrades
Breadth Stats courtesy of Pradeep Bonde

Your Trading Is All Wrong

In my opinion, there is no right way or wrong way in this business.  Your P&L is your daily, weekly, and monthly report card.  There're a million ways to skin a cat in the stock market. Value players buy distressed beaten down stocks, others are momentum traders who buy stocks that are moving up, you have the mean reversion players, trend-followers, passive investors, etc. Some investors draw lines on charts and look for patterns, others need a reason why they should buy something, that gives them the comfort that some thinking actually took place.

You are always going to have these different type of investors stating that their strategy is better and that the other strategies are inferior. If you don’t have a strategy, then sadly you will be pulled in a million directions especially nowadays with social media. Get one.

Imagine if your child was a star high school basketball player with an unorthodox jump shot. But, he makes just as many shots as the best players in the country, are you going to change the way he shoots? Let your P&L do the talking and cut out; this is the right way, or that is the wrong way noise. 

The traders who yell the loudest about their strategy are normally the stubborn ones who fail to adapt, they suffer the biggest drawdowns. 

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fzorrilla@zorcapital.com   @Zortrades

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What People Say and What They Do Are Two Different Things

Everyone wants to be a contrarian nowadays; they make a big deal out of every indicator that validates their thesis.  Going against the crowd just to go against it is not contrarian, I explained that here in a recent post-The Crowd Is Right Within A Trend, Wrong At Turning Points.

The American Association Of Individual Investors is a sentiment indicator that has been getting a ton of press lately.  It measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months.  Individuals are polled weekly.  The survey consists of normally 100-350 individuals, this is a tiny sample.  But more importantly what these individuals are saying is not what they are doing.  The most recent poll showed 33.3% were bullish, 37.6% neutral and 29.1% were bearish.

When the members were asked if the during the recent market pullback, did they pull any money from the market, here's what they said;

Be careful what you are basing your contrarian thesis on.

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fzorrilla@zorcapital.com   @Zortrades

The Biggest Mistake You Can Do As A Trader

It is important to know why you are buying a stock, is it for technical reasons, fundamental reasons, or a combination of the two.  If you bought a stock for technical reasons, then you must adhere to technical breakdowns.  The last thing you want to do is purchase a stock on technical grounds, then when the stock goes against you; you start reading the company's headlines, the 10k, who major holders are, etc,.  Basically selling yourself why you should avoid taking a loss (take the loss).

There is a big difference between a company and its stock.  In the short term, the stock can trade at a tremendous disconnect to the company’s prospects.  I believe that most investors at one point or another used technicals to buy stocks, but shied away from them when they got tired of taking losses. It takes a lot of discipline to sell when stocks break down.  A majority of investors hold on to losers hoping that they will come back, the minute they sell they realize that all hope is gone.  By holding on they keep the hope alive, and in a bull market most of them will get bailed out, but not so much in a bear market.

Selling yourself on why a stock is a good company after you bought it for technical reason will only put you more in the hole and in a death spiral if we are in a bear market environment. Some stocks never come back.  So before you buy a stock, write down the reason why you are buying it.  If it's for technical reasons, then sell it when it breaks down.  If you are buying it because you like it fundamentally, then every pullback should be a buying opportunity until the thesis changes.  Just make sure that you are not just a headline fundamentalist like most people are.  If you are, then you will have absolutely no conviction whatsoever to add when the price comes in, and you will be a seller at the worst possible time.  And yes, in a bull market all your sins will be forgiven, but in a bear market you will be toast.  Don’t be a technical buyer and a fundamental holder.

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fzorrilla@zorcapital.com   @Zortrades

Picture Felix

The Crowd Is Right Within A Trend, Wrong At Turning Points

Everyone wants to be a contrarian nowadays.  I'm of the opinion that if the market is trending lower it is only natural for investors to feel bearish. It's human nature.  What you want to look for is for sentiment to be at an extreme.  But, more importantly note that a contrarian approach works better in the stock market when you are looking for a bottom than when you are looking for a top.

Currently, the market is in a downtrend, the natural feeling for most investors is to feel bearish. Those who suffered significant losses after the 2000 top and the 2008 debacle will probably feel more bearish than most, again all natural.  What we want to do is look for extreme readings and or wait until the underlying instrument (market) starts trending up.  The crowd is right within the trend, wrong at turning points.

“The art of contrary thinking consists in training your mind to ruminate in directions opposite to general public opinions; BUT WEIGH YOUR CONCLUSIONS IN THE LIGHT OF CURRENT EVENTS AND CURRENT MANIFESTATIONS OF HUMAN BEHAVIOR”–Humphrey B. Neill

“The contrary theory is a way of thinking but lets not overweigh it.  It is more of an antidote to general forecasting than a system for forecasting”.-Humphrey B. Neill

People think differently today from the way they did, say, prior to 1929; that is, prior to the Great Depression and the New Deal.  WHEN YOU STOP TO THINK OF THE MILLIONS OF YOUNG PEOPLE WHOSE JUDGMENTS AND PERSPECTIVES IN LIFE HAVE ACTUALLY BEEN FORMED SINCE THE ADVENT OF THE NEW DEAL”.-Humphrey B. Neill

You can take the above statement and apply it to the Millenials and their parents.

Being a contrarian is not just going against the crowd just to go against it, especially if the underlying instrument is moving in the same direction as the crowd thinking.  If the underlying instrument (market) is trending higher, close to its 52 week high, investors are betting against it, the media is bashing it, then that is a worthy contrarian play.

“One of the most important tenets of our Expectational Analysis^® approach is that the power of a contrarian indicator is much greater when the underlying sentiment runs counter to the direction of the stock. For example, pessimism would be an expected reaction to a down trending market and would therefore not be a valuable contrary indicator. On the other hand, skepticism in a rising market is a powerfully bullish combination, as market tops are not seen until optimism reaches extreme levels”.–Schaeffer Research

The SP500 made very little progress for eight months (Novermber 2014-July 2015) then it plunged 12% from high to low in a few days.  Should investors feel exuberant about that or perhaps a little skittish maybe even slightly bearish?

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fzorrilla@zorcapital.com   @Zortrades

During Stressful Times Keep Your Eye On The Prize

When it comes to investing, time is your most valuable commodity.  The Indices have a tendency to trade higher over time.  In the last 89 years, the SP500 has been up 73% of the time with an annual gain of 21%.  Negative years have occurred 27% of the time averaging an annual loss of -14.29%. This doesn't mean that pullbacks are not painful, stressful, stomach churning, etc.  In hindsight, they are a walk in the park, but when you are going through a drawdown, your behavioral flaws will fail you almost everytime.  Hence, the importance of knowing the history of the market (SP500).

Another important note is to recognize that individual stocks are not the "market".  Most companies fail, “The Russell 3000 index measures the performance of the largest 3000 U.S. companies, 98% of the investable U.S. equity market.  40% of the stocks had a negative return over their lifetime, 20% of stocks lost nearly all of their value, 10% of stocks recorded huge wins over 500%.  80% of the gains are a function of 20% of the stocks. --The Ivy Portfolio

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fzorrilla@zorcapital.com   @Zortrades

What To Expect After The Fed Speaks

Today will be a big day.  The Fed will decide whether or not they are going to raise rates and hint what they plan to do or not do.  Many including myself expect a volatile environment; the fact that we have quadruple witching tomorrow will only help exacerbate the move.  How the market reacts no one really knows, based on the recent up move lately, one can assume that something has been priced in and a small retracement of this recent move is probably to be expected.  I believe that in the short term any extreme move from the announcement can be faded.  The key is to have a plan that takes into account different outcomes.

As you can see below, the SP500 has a lot of work to do.

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fzorrilla@zorcapital.com   @Zortrades

Trading 101

To become successful in the market long term, you have to become a student of the market. You have to know yourself, and match your personality with a particular time frame, and strategy. For one, I feel more comfortable holding on to stocks for a short period taking advantage of the many short term momentum bursts that many stocks exhibit.  A typical stock that goes up 100% or more in one year will make a bulk of those gains in a handful of days. The rest of the time it consolidates by either trading sideways or down.

Top 9 stocks ranked by year to date performance

I'm not very comfortable guesstimating what is going to happen six months from now fundamentally, let alone a year from now. I rather focus my attention on finding a bunch of 5-20% winners than finding five 100% winners. As of 9/16/2015 we have 1,311 stocks above $2 that trade on average over 100k shares daily that are up year to date.  Only 66 out 1,311 (5%) stocks are up 100% or more, 785 (60%) are up between 10% and 100%.  The averages state that it is easier to find a handful of 10-20% winners than it is to find 100% winners. And, most 100% plus winners started with an initial 10% move unless it was bought out.  A serious of small winners will allow you to swing for the fences when you find a stock that has a game-changing catalyst that can potentially make a huge move.

“The Russell 3000 index measures the performance of the largest 3000 U.S. companies, 98% of the investable U.S. equity market.  40% of the stocks had a negative return over their lifetime, 20% of stocks lost nearly all of their value, 10% of stocks recorded huge wins over 500%.  80% of the gains are a function of 20% of the stocks. --The Ivy Portfolio

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fzorrilla@zorcapital.com   @Zortrades

Don't Overstay Your Welcome With These Vehicles

The volatility ETF's are currently the talk of the town (VXX, UVXY, TVIX, VIXY).  Most investors I have spoken to have no idea how they work, the most frequently asked questions is; why is the VIX up 10% and the VXX is only up 2%?

Over time, this cost adds up, and is the primary reason VXX is down an eye-popping 99.6 percent since its launch, and down significantly in every year since inception. Fluctuations in the underlying VIX Index matter, too, but over longer-term horizons, contango are what's been killing returns for the ETN.--ETF.COM

Read the rest of the article here

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fzorrilla@zorcapital.com   @Zortrades

6 Lessons From Legendary Investor David Tepper

David Tepper manages more than $20 billion dollars for his fund Appaloosa Management.  The fund returned a record 42 percent in 2013 and has had only three down years in its history: 1998 (down 29 percent), 2002 (down 25 percent), and 2008 (down 27 percent), according to the book "The Alpha Masters".  But the years after those declines, the fund had a record net performance in 1999 (up 61 percent), 2003 (up 149 percent) and 2009 (up 132 percent).-CNBC

Institutional Investor's Alpha ranked Tepper number one for earning a $2.2 billion paycheck in 2012, in 2013 he earned $3.5 billion.  David tends to run somewhat of a concentrated equity portfolio, as 6/30/2015 is top 10 stocks holdings accounted for 68.81% of his equity fund.

This morning David Tepper made a rare appearance on CNBC, he is always fun to watch and very informative.  We are not going to focus or even talk about his opinions in regards to the current market situation or what he thinks might happen.  Like everyone else, he is going to get some calls right, and he will get some wrong, and in between he could change his mind, without telling the world that he did.  I want to highlight a few market principles that I believe are more important than his thoughts about the current market situation.

Here are some insights from today's interview, I'm paraphrasing;

1. "We were involved in China.  I was reading the situation there wrong.  I thought they were easing when they were not easing, and I lost money in the Chinese market."  It doesn't matter how smart you are, how much money you manage, or what Ivy league school you went to, you are going to get some calls wrong.  Don't try to avoid the unavoidable.

2. "We had 10, 15 and 20% corrections all the time".  The average intra-year decline in the SP500 since 1980 has been roughly 14%, a little less since 2009.  Despite the 14% intra-year decline, the SP500 has closed positive 27 out 34 years, 79%.  Corrections are part of the game.

3. "If you are the average guy you will do well over time with the stock market". If your definition of the "stock market" is the SP500, then I agree with this statement.  Time is your best tool in the market.

4. "I'm not real comfortable being short stocks because there is a bias that stocks will go up over time". If you change "short stocks" to short the market (SP500) then the statement is 100% true. Most stocks don't do well over time, the SP500 does.  “The Russell 3000 index measures the performance of the largest 3000 U.S. companies, 98% of the investable U.S. equity market.  40% of the stocks had a negative return over their lifetime, 20% of stocks lost nearly all of their value, 10% of stocks recorded huge wins over 500%.  80% of the gains are a function of 20% of the stocks. --The Ivy Portfolio

5. "Flat is not a bad place to be."  The market is not always black and white.  If you are not crazy about the long side that does not mean that you have to be short and vice versa.  Doing nothing sometimes is better than trying to pick a side.

6. "There is a time to make money and there is a time not to lose money".  80-20 rule, a bulk of your profits will come from 20% of your trades.  It also applies with time, a restaurant will probably lose money Sunday-Thursday and go into the black Friday and Saturday.

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fzorrilla@zorcapital.com   @Zortrades

Source; CNBC

Why You Should Consider Investing In Biotechs and Why You Don't

Akebia Therapeutics up 70% in the after hours is why you should consider buying biotechs and Tetraphase Pharmaceuticals down 79% is why many don't.  Small-cap biotechs offer the biggest mispricing (opportunities) in the market; a promised land full of landmines.  A basket of biotechs and or the ETF's (XBI, BBH) make more sense to me than a flyer with one.

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fzorrilla@zorcapital.com   @Zortrades

#STOCKS 

The Volatility Continues

Ever since the SP500 broke down from a 7-month range on 8/20/15, it has become very volatile. We have seen huge down days, followed by huge up days.  This all comes after one tightest six month ranges in the history of the SP500.

I still believe that the current situation is similar to the summer of 2011, which we have mentioned numerous times, initially on 8/24/15.  In the summer of 2011 the SP500 hit its first low in August, it whipsawed back and forth for two months before it ultimately bottomed in October.

In this environment, one must avoid chasing rips after multiple up days and avoid selling into big down days.

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fzorrilla@zorcapital.com   @Zortrades

The Stock Market Commandments

**The market and stocks go up AND down, Not up OR down.

**Stocks are nothing but letters and numbers; they don’t know who you are and at what price you own them.

**There is a big difference between a company and its stock!!! Many companies continued to be great companies for months, quarters, years after their stock peaked.  And also vice versa, there are a ton of "bad" companies that have great acting stocks.  Would you rather own a good company or a good stock?

**You don’t know if something is a good buying opportunity until you sell it.  AOL, CSCO, SUNW, MSFT, DELL, YHOO, TANDY, NIFTY 50, were all considered excellent buying opportunities by many.

**If you believe in BEAR RAIDS, then you have to believe in BULL RAIDS.

**It’s never DIFFERENT.

**A good company or a good stock is one that you buy, and it goes higher in which you profit.

**For some, being a long-term investor, just means: I own the stock, its down, and I don’t want to take the loss.

**When the stock you own is down, you already have a loss, you just haven’t  realized it.

**Stocks go up when you have more buyers than sellers.  Stocks go down when you have more sellers than buyers.

**Tops start from 52-week highs when things look great.

**There're a million ways to make money in the market; no right or wrong way if your P&L is positive.

**Never be so quick to say that you will buy a pullback before you get the pullback.  The little friendly high school sweetheart might not be the same girl when she gets back after two years working at Rick’s Cabaret.

**Price targets are foolish, to say I won’t sell a stock until it reaches a certain level is STUPID.  “I will wait until I break even to sell it-(AOL HOLDER)”, “when it gets back to 50 I’ll sell it”-(CSCO HOLDER). Things change, the market environment changes.

**Overbought and oversold are two different animals.  Fading oversold levels works a lot better than fading overbought levels.

**When a stock is going down, don’t blame the shorts, blame the sellers, the shorts have 1/10th of the buying power (selling power) that long funds have.

**Every significant pullback starts as a -“it’s consolidating great”, “buyers are in control”, “it’s just resting”, “it’s an orderly pullback”.

**What the so call Gurus do is more important than what they say or write on some blog.

**Don’t try to make up for all your losses with one trade, you will fail.

**YOU CAN ALWAYS BUY STOCKS BACK.

**Do not let your current positions cloud your judgement, if it is, then go flat (sell it) then analyze it…you will see things differently.

**This game is not about being right or wrong; it’s about making money.  Many rather lose money than admit that they are wrong.

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fzorrilla@zorcapital.com   @Zortrades

The Whipsaw Will Continue

I continue to believe that the market is following the same trajectory it did in 2011 that we mentioned here a week ago, CLICK. 

With that being said, don't short in the hole and certainly don't chase any rallies after multiple up days.

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fzorrilla@zorcapital.com   @Zortrades