Tuesday

Failed Hindenburg Omens

Post a Comment September 28, 2010 – 4:04 pm |   | Permalink |  Print This Post |

We have decided to hold our (mainly net short) positions, bunker down, and look away. I wouldn’t be going all in short US-markets here - the continued bad numbers in unemployment and consumer confidence is NOT good for bears. Markets dip with September consumer confidence worst in X years - thats NOT good to short into. Who cares what the numbers are. Confidence is a lagging indicator, has little/no predictive value (maybe to as a contrarion indicator!), and are all possibly made up.

And if emerging markets (or Amazon or Salesforce.com) is anything to go by, insanity can prevail for longer than one can remain solvent. And the Tepper-rationale of a win win in equities (buy stocks you cant be wrong - if market improves stocks go up, if market doesnt improve bernanke comes along with QE - stocks go up) sounds like it makes sense. We watched a CNBC video on Amazon below - justifying a PE of 66. And Cramer going long Salesforce even at a PE of 200 (Sounds bloody convincing - almost had me changing camps to the long side - no sarcasm). But all of the above is based on assumptions of knowing the unknown - a perfect market. That QE2 is in the pipeline (expectations being factored in as markets rally, question is how high can it go?), that Amazon will continue to grow at 30-35% yoy for 2 consecutive years to bring its PE down to 39 (which is apparently good value assuming more 30% growths down the road - don’t forget the bigger you are the harder it is to grow at 30%!). I contend that the market does NOT know everything, and even if it does assume correctly, it is being priced in as we speak. The surprise is therefore to the downside (funny how not long ago when Hindenburg fever was on, the surprise was to the upside). For the record, since the first confirmed Hindenburg Omen, the market is now 5.5% above that level (Dow 10271 on 19 August). George Soros spoke of the theory of reflexivity in his books - ie the two-way interaction between market participants and the market, and that market participants can affect the course of the markets. The Hindenburg Omen phenomenon (in our interpretation) is an example of how market expectation (of a crash) altered the course of the market (no crash). There may be statistical truth in it before it was made public. From our analysis of previous failed Hindenburg omen charts , the rallies after a failed HO can go anywhere from 5-44% - but many have been saved by a subsequent HO which takes markets down below the preceeding failed HO. So, the irony is, when this market is ready to roll over, another Hindenburg Omen will be triggered. By then, everyone (the bears) will be staying clear - some may even go long. That is when the real crash comes. We are NOT predicting another HO, but just saying that if it occurs again, respect it. If you have the time and patience (it certainly took a toll on ours), have a look at our previous analysis on failed Hindenburg Omens and the course of events after that.

Another point to make is markets love testing the resolve of governments. When the bank of England declared that they would keep the sterling up it was tested, the Japanese governments attempt to keep the yen weak is being tested as we speak (Yen/USD 83.70), and soon in our view the Fed’s implied QE2 will be tested by market participants. (by the way, we think the Japanese government may be successful if it wants to - wanting to devalue your own currency is easy-just print!, but wanting to keep it up is impossible as Soros realised - so I would not be longing the yen based on technicals and on news reports on how currency intervention always fails without cooperation)

For now, look away and do something more productive instead of watching the screen.

Hug a Tree!

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Before we go, for the record and if our message was not clear enough above, we do not believe in this rally. The clock is ticking. Let’s hope for some more Tepper-time on mainstream media, and keep Nouriel Roubini away! (check all the dates Roubini is invited to CNBC - its usually preceeding a rally. In our view, its no fault of his - the “poorly timed” pre-rally indicator is probably a function of program planners who invite bear speakers when market is down, and invites investors like Warren Buffett when the outlook is good.