Google, or something else?

Yesterday, I asked a benign question over at RM’s columnist conversation:   

How much of this selloff is really attributable to Google?

No one answered the question.

Instead, I got the usual "Bear"accusations — despite my uncomfortably Bullish 1H 2006 call (Cody was an exception). I was told that my question was a demand for the Bulls to restate their case (it was nothing of the sort). And I interpreted a reminder that markets had rallied 8.5% since the lows, as an implication that "Bearish Barry" has somehow missed the run.

So as I had promised I would do in Debate 101, I ignored those comments. Instead, I noted the following:

if I am still Bullish short term . . .

For those of you who may not be familiar with my market positions, I have
been (uncomfortably) Bullish since June 2005, and but for a brief period before
and after Katrina, I have stayed that way (miserably, may I add).

As the Cult
of the Bear
trio explained, I am of the belief that the market is topping
out sometime 1H, and likely Q1 2006. It then turns rather Bearish for the next
few Qs.

Last night, I wrote a commentary that went out to our Research clients today,
advising them to "Get Darwinian on their Portfolios."

What does "Get Darwinian" mean? I suggest its time to "Cull the herd" —
excise the weak, the sick, the lame from your holdings. That doesn’t mean dump
everything, and its not a market timing call or a declaration of a top — yet.
But the increasingly narrow advance suggests to me that it is now time to lose
the stocks that are not participating in the rally off the June or October lows.

That’s about as much restraint as I could muster . . .

For the record, Google was, IMHO, a small part of yesterday’s difficult session:

-Crude prices rose smartly;
-The Yield Curve Inversion widened further;
-Ongoing signs that stimulus is fading;
-The US economy continues to show signs of general slowing;
-The Dollar took a beating;
-Bonds rose steadily all day;
-Gold rallied;

Joanie summed it up beautifullly:  "I wonder why stocks, against this crystal clear macroeconomic backdrop, can only see Google? Oops. Forgot. The market can only focus on one thing at a time. Too bad. Next case."

I find it hard to disagree with her logic. . . .

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  1. Josh commented on Mar 1

    I noticed the same thing. As usual, Cody and his gang are more interested in juvenile taunting than genuine intellectual debate.

  2. angryinch commented on Mar 1

    Cody’s at it again today and amazed and enthralled by the wildly bullish action. He sees it as a sign that it’s onward and upward. I reiterate: look at a frickin’ chart once in your life.

    Take a gander at early March action over the past, let’s say, 10-15 years. Notice that the first week of March is frequently straight up. And guess what? Straight-up early March action is far from bullish intermed-term.

    Going back to 1994, the SPX has risen (often quite strongly) during the first week of March in 8 of 12 years. In ALL 8 occurrences, the SPX made a multi-month top in March (1994, 1996, 1997, 2000, 2001, 2002, 2004, 2005.)

    Conversely, early March weakness has proven to be s/t bullish: 1995, 1998, 1999, 2003.

    I know Cody doesn’t believe in charts. But if he thinks it’s bullish that the market is running like a stuck ape on March 1—when all evidence points to the contrary—then he believes in the tooth fairy.

  3. Rob commented on Mar 1

    First time poster. I read your site daily, and I generally agree with your analysis, particularly with your assessments of the underlying negative factors (job numbers, consumer spending, etc.) at work that will one day catch up with the US economy.

    Where would you recommending investing retirement money right now, notably for someone with another 25-30 years left to go before retirement?

  4. royce commented on Mar 1

    Why would the sell-off be attributable to Google? The story on that stock has been unique and disconnected from the rest of the market since their first big increase. It’s on a totally different pace/path than the rest of the market.

  5. B commented on Mar 1

    Yesterday, at the very open, well before the Google CFO’s statements, the NYSE AD line was -1000. That is an awful open. The NAZ wasn’t much different. So, historically, those types of opens have such a low probability of any meaningful turnaround that the day’s general negative tone was set well before the Google mini massacre. Oh, and the VIX turned up well before Google and the market was already selling off.

    Your buddies need any more proof? Is Google traded on the NYSE? There were nearly 2 billion shares exchanged on negative volume on the NYSE. One stock can have that effect? One stock………… not even traded on the NYSE? I don’t see any historical precedence for that. Not saying it isn’t possible. Without checking I can’t confirm it, but I do believe that is worse than options expiration Friday in January which, if everyone recalls, was a total market rout. And, at least that day could possibly be explained by delta hedging and/or the oft debated phenomenon where index options tend to gravitate towards maximum pain at options expiration, which they did on that day.

    Today, in no way, makes up for yesterday’s very ominous day. It was the most blatantly ugly day of this year IMO.

    Btw, per angrygrinch’s comments, the SMH’s hit an NR7 and was noticably much stronger than the indices yesterday. Oh, and it just so happens to coincide with that two brokerage upgrades on specific semis before the open this AM. That is a guarantee to draw lecherous traders in droves. It may have actually been coordinated for all I know. They hammered that bad boy through the roof this morning. The SOXX was up 3.3% in 2 hours. That’s only a 2,500% per annum rate of return. Ahhhh……Who knows when this thing will finally go higher or capitulate but yesterday should not be discounted. It’s another sign of distribution. And there are enough of those signs to be cautious if not down right bearish.

    Here’s another $64 question. What does this last month’s action in Google portend for Google? I have a pretty strong opinion on that one based on some things I see……….

  6. David Silb commented on Mar 1


    I understand your anger. I think we are underestimating how efficient businesses are in controlling inventories and gauging market variations. A historical view of inventory was to build as much as possible and sell as needed. Then a slowdown would take place and the manufactures would dump finished products to get them out of inventory. The ups and downs played havoc in the economy; or as we call it the business cycle.

    With the advent of “just in time” inventories and logistics improving to meet demand better, the peaks and valleys are thus smoothed out. Business and the economy are much more in synch with one another.

    Now you have an economy like we have now. In my humble opinion the slowdown will occur because of these following varying factors. Business had ramped up and met demand and is cutting costs thus keeping efficiencies very high. However, many of the gains were through large amounts of credit created through low interest rates, not higher wages and not through consumer saving and then purchasing or profits being utilized.

    This creates a debt factor that is very high. As if a game of economic musical chairs is being played with easy credit. Sooner or later the market will exact payment, be it in the form of higher profits or repayment of notes held by creditors or reduction in liabilities, i.e. businesses laying off workers.

    This will cause a contraction in consumer spending causing a contraction in production. The consumer is the lynchpin in my scenario. Others may see something else.

    Easy monthly payments become extremely difficult to make when wages are sapped by increasing higher prices do to increased world demand for raw materials also known as the “China factor”.

    The current delay in the downturn is do to business able to respond changes in the economy more efficiently. But the laws of economics still apply. Business is doing well managing demand but ultimately it will reach a slowdown or tipping point. Will it be a soft or hard landing? Well, that will be up to human nature. Are people willing to take a reduction in their lifestyles for the sake of their bottom lines? If history is any indication the answer is no.

    A Chinese proverb says: May you live interesting times.

  7. angryinch commented on Mar 1

    As far as the SMH/SOX goes, take a look at the charts from 1Q02 and 1Q04. The SOX made a vertical 25% run from March 1-March 8 to 641. But that was the top. The SOX made another 20% vertical run in late Dec-early Jan 2004. And that was the top. If the SOX moves 22% from this morning’s low of 525, it would finally tag the 1Q02 high of 641. Short-term vertical moves by the semis have marked recent tops, not the initiation of new market uplegs.

  8. TonytheTiger commented on Mar 1

    You can add this to your list Barry, (technically speaking of course)

    1. The market was short term oversold, and again today
    2. Momentum has been dropping on the Dow since 2/15, and 2/17 on the SP
    3. The Nas developed a pattern as of late; 3 up days followed by 1 down day, then 2 up days followed by 1 down day, then 1 up day followed by 1 down day. Today, so far looks like an inside day, and we are short term oversold. Not to mention a strong ceiling overhead.

    What does all this mean?, nothing to a long term investor. Significant, to a short term trader. We may need a catalyst to get us over the hump. Maybe some sort of disaster, natural or otherwise. Then, maybe not so extreme.

  9. B commented on Mar 1

    I tend to think that short term vertical move you reference is in. I think it was the 20% run from October. Could be wrong. I watch both charts for support and resistance but I tend to gravitate towards the SMH for trading since the SOXX is not a traded index. One is more weighted with semis and the other with semi equipment. But………that said, both hit strong resistance with a possible double top on the SOXX in place and a strong crack down from a bearish rising wedge on the SMH. Those aren’t guaranteed levels but with the monthly momentum turning negative on semis and us being this far into a tightening cycle, wow, that would impress the hell out of me with another 20% run.

  10. scorpio commented on Mar 1

    i thot yesterday’s existing home sales #’s and inventory had some effect on the market, and will have a much greater effect as the year unfolds. this thing is turning down very fast and could cascade. i have to believe the market will follow it down

  11. angryinch commented on Mar 1

    Hate to beat a drum, but Cody went wild about TXN being up 6% today. “It’s important!”, he says. Guess what, it’s March 1. Look at a chart. TXN always goes up many % on the first day(s) of the month:

    Jun 1 05: +3% (went nowhere after that)
    Jul 2 05: +6% (rallied to Aug top)
    Aug 2 05: +3% (went nowhere)
    Sept 1 05: +2% (topped a few days later)
    Oct 1 05: +2.5% (fell hard afterwards)
    Nov 2 05: +5.6% (rallied to Dec 2 top)
    Dec 1 05: +5% (topped the next day)
    Jan 1 06: +4% (topped four days later)
    Feb 1 06: +2% (topped 12 days later)

    The moral of the story: buy TXN on the last day of the month. Then sell it.

    Long-term, TXN is just trading in a range. Has to get above $35 to “breakout”. Otherwise: sell rallies, buy dips.

  12. clare commented on Mar 1

    I hope you don’t let these cultists get nder your skin. I’m pretty agnostic, but any reasonable person would see there are problems in the economy and in valuations based on historical standards that could lead to significant declines.

    When people deny that it’s faith based reality. The same people ignore statistics on Iraq such as electricity, ater and oil production being below Saddamite levels. To the extent that they can’t ignore him they accuse William Buckley of being a leftist terrorist lover.

    The stock market and the economy must go up because great leader rules.

  13. angryinch commented on Mar 1

    “B”, you could be right about the semis already having peaked. I’m just pointing out that it wouldn’t be unusual to see them run one more time. But it certainly wouldn’t be bullish.

    I figured something was up when all the chop houses started downgrading the semis over the past few days. You knew that was the signal to jam the semis higher…at least for a bit.

    Hate to be so cynical, but that’s the nature of the market these days. Up is down, black is white. I suppose that’s what happens when 50-70% of the trading is black box and hedgetarians and prop desks represent a greater and greater pct of volume. Repeated outsized, short-term movement signalling very little.

    What else can you do with the SPX and Dow trading in a <3% range for the past 3 1/2 months?

  14. Bynocerus commented on Mar 1

    Over on RM a few months ago, Howard Simons made the point that no one pulls a “party off (not his term, mine, or more accurately, E Cartman’s)” switch when the yield curve inverts after being flat; after all, what is the qualitative difference between a yeild curve @ .01 and -.01? So, I did some quick calculations.

    I wanted to figure out what the market looked like when the 10’s minus 3mos numbers dipped below .25 for three consecutives months and included a yield curve inversion. For my calculations, I decided that if the yield curve became positive, then reinverted/stayed below .25 for three consecutive months, I would include it in the study. Still, I only had 8 time frames. Obviously, there was no way to know in advance whether or not the yield curve was going to invert, but the yield curve inverted on the February close, so we don’t have to worry about that uncertainty.

    I used a month end close for the yields and the Dow Jones as my index, and these are my results:

    6 months later
    Positive Returns: 2
    Negative Returns: 6
    Average Return: -4.21%
    High Return: 3.47 (2000)
    Low Return: (11.5) (1966)

    12 months later
    Positive Returns: 2
    Negative Returns: 6
    Average Return: -7.49%
    High Return: 2.8 (1978)
    Low Return: (22.52) 1969

    Furthermore, if you look at the five “periods” of yield curve inversion, the market dropped an average of 22% on a monthly closing basis from the break of .25 on. Since we’ve already inverted on a monthly closing basis, how much US stock exposure do you really want to have?

  15. Dan Weber commented on Mar 2

    Two words: Yield Reversions. The yield spreads tightened today and much closer than they have been for the last few weeks. I think the 10 yr will cross the 2 yr again and there will no longer be a yield inversion. Thus my thesis that the Fed raises to 6.5% Fed Funds rates.

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