Posts filed under “Technical Analysis”

Margin Debt Hits an All-Time High . . . So What?

Every now and again, a way of looking at markets suddenly gains traction. Data gets assembled, analyzed, reviewed. Eventually, it becomes the basis of traders’ decision-making process. It even can become part of Wall Street lore.

The problem that arises all too often is that this approach is statistically bogus. The data gets cherry picked; backward-looking analysis gets form-fitted to what just happened and has no meaning for what is most likely to happen in the future. Confirmation bias and selective perception can lead an investor to lose objectivity, choosing an approach that justifies an existing portfolio mix, as opposed to objectively evaluating the data.

Consider as an example the ominous-sounding Hindenburg Omen, a technical analysis that purports to signal the likelihood of a market crash. That’s exactly what it’s been doing — unsuccessfully — since 2010. This sort of recession porn allows people to confirm their existing prejudices. After five years of money-losing forecasts, theHindenburg Omen’s following among traders is fading.

But many other dubious or disproven metrics are still out there. Consider the Murdoch Indicator, or the Super Bowl Indicator, or theMascot Indicator or even the Ticker Tape Parade Indicator. A decade ago, I termed this phenomenon YAII – for Yet Another Idiotic Indicator.

The most recent such metric? New York Stock Exchange margin debt. (Margin debt is when an investor borrows against the stocks he owns to buy more shares.) Margin debt has reached an all-time high and, as we have been told repeatedly, this is a fatal sign for markets.

There are two problems with this: The first, and lazier criticism, is to point out that analysts have been discussing the danger of this for at least the past four years (see chart below from two years ago). Margin debt was cited as a precursor to doom in 2011 and 2013 and last yearand again a few days ago.

margin

The more substantive analysis is to note that this is a correlationwithout much predictive value. It is a coincidental, not a leading indicator. Check the historical data and you will find it gives little warning of an imminent market crash.

Let’s delve into the details:

 

Continues here: A Market Indicator That Predicts Nothing

 

 

Category: Analysts, Really, really bad calls, Technical Analysis, Trading

What is Market Breadth Telling Us ?

During the past few years, I have referred to market breadth as one of the more important metrics of the stock market’s health. As we close in on new highs in the cumulative advance-decline line, it is time to revisit this internal indicator. As the chart below shows, the Standard & Poor’s 500 Index has rallied from…Read More

Category: Markets, Technical Analysis

Source: Bank of America, Merrill Lynch

Category: Cycles, Technical Analysis

Cyclical Bear or Secular Bull Market ?

When discussing bull and bear markets, it sometimes helps to think of them as coming in two distinct flavors: Short-term cyclical markets and long-term secular ones. Knowing one from the other isn’t always easy. A number of  veteran market observers such as Raymond James’s Jeffrey Saut, technician Ralph Acampora, strategist Laszlo Birinyi and market historians…Read More

Category: Cycles, Investing, Markets, Technical Analysis

NASDAQ 5000 – Crash? Bubble? Fair Value?

NASDAQ 5000 – Crash? Bubble? Fair Value?
March 4, 2015

Almost fifteen years ago, on April 1, 2000, we wrote and published a piece entitled “Will the NASDAQ sell-off become a crash?” We have now retrieved that piece from our archives and posted it on our website.

In preparing that piece we evaluated the stock market and made a theoretical calculation in which we merged two companies, Cisco and Microsoft. We assumed that their reported earnings were accurate. We found that the two companies merged together had earnings of $10 billion and their merged theoretical market valuation amounted to $1 trillion. Our conclusion at the time was fairly straightforward. There was nothing wrong with either company. Both Cisco and Microsoft were fine, large, developing, worldwide leaders in the Technology sector. The stock price, however, was wrong. At 100 times earnings, the price of the theoretically merged company’s shares was not justified by any valuation technique.  The combined GDP of all countries in the world was estimated at $30 trillion.

We concluded in our piece that the NASDAQ at 5000 was setting up for a crash. The fourth page measures the value of Cisco against a list of companies (that list included Apple).  15 years ago, we forecast that NASDAQ 5000 would lose over two-thirds of its value before the crash and sell-off ran their full course. Never did we think that the result would be a loss of 80% of its value.

This week, Convergex published a piece including their discussions of NASDAQ 5000. Author Nicholas Cola titled the piece “NASDAQ 5000 – Don’t Call it a Comeback” (March 3, 2015).

(See below for full report)

Here is the summary, which tells most of the story:

With the NASDAQ Composite back to the magic 5,000 level, today we look at the “heavy hitters” in the index. The companies with the top 10 weightings comprise some 32% of the entire index, led by Apple (9.9%), Microsoft (4.8%) the two flavors of Google (4.6%). So where do NASDAQ Comp valuation levels sit at 5,000, and what do you get for your money? Forward P/E multiples based on analyst expectations are 19x earnings, a noticeable premium to the S&P 500 at 17x. In return for that markup, those top 10 names in the NASDAQ offer the promise of real revenue and earnings growth.  Analyst estimates for top line growth in 2015 for the top 10 names average out at 13.7% and the 3-year CAGR through 2017 is 11.2%.  That translates into 9.4% earnings growth for this year and 11.7% compounded growth through 2017.  The real question behind NASDAQ 5,000 Version 2.0 is simple: what price do you pay for growth stocks versus the broader index.

Let’s take a look at the issue now compared with conditions when our NASDAQ 5000 piece was written 15 years ago. Microsoft is now 4.8% of the index, Cisco is 2%, and Apple is approximately 10% of the index and the largest weight. The Convergex research piece provides the remaining information in detail. For information about Convergex, visit www.convergex.com. If you want to send them a reply on their commentary or obtain a copy of Nicholas Colas’s March 3, 2015, piece, we suggest sending an email to Convergex at morningbriefing@convegex.com. Note: Cumberland is a user of Convergex’s services and receives their research missive daily.

So what does it mean that the price/earnings ratio is no longer 100:1? It is now in the mid-teens. The stocks currently represented in the NASDAQ are still heavily focused within the Technology sector. Some of the companies, whose market prices may be high relative to past references, are supported by profits and robust estimates of future growth. What is the condition of those companies? Do they have large reserves of cash, or are they involved in heavily leveraged debt structures? Cash seems to be the answer in most cases.

What is the basic condition of the Technology industry? In the dot.com era 15 years ago, as the NASDAQ steamed toward 5000, there were many companies that had no product or earnings. They had only future prospects. Companies formed in garages and found themselves with overnight capitalizations in the billions. Technology sector fever gripped the stock market as a whole, with the Tech sector priced at nearly one-third of total market value at its peak. The price of stocks relative to America’s gross domestic product (GDP) reached all-time highs, based upon trillions of dollars in market value for companies that were little more than concepts. By some estimates, the US market cap was $7 trillion in excess at the top of the tech bubble.

Is the picture the same today with the NASDAQ at 5000? We think not. Could the NASDAQ go through a correction? Yes. We have had an extended bull market of six years’ duration. Corrections have been elusive but are inevitable. That includes the NASDAQ.

We wrote about the NASDAQ 5000 15 years ago as a bubble, the forerunner of a crash, and a valuation supported without earnings or momentum other than prices set by speculative fever. Now, 15 years later, the NASDAQ represents companies that have worldwide growth potential and are revealing once again the remarkable robustness of technology advancement as a business model. These companies are very American. Look at the NASDAQ list and note the nature and structure of these success stories that are rooted in the United States.

Is the NASDAQ 5000 a crash in the making? Fifteen years ago the answer was, without equivocation, yes. Today, the answer is no. It is 15 years later.

We are overweight the Technology sector in our US exchange-traded fund (ETF) managed accounts. Those ETFs contain the stocks mentioned in the Convergex report along with many others. We think the outlook for this sector’s evolution is strong and strategically long-term, with higher earnings, profits, dividends, and stock prices ahead.

We put together a short video on this NASDAQ 5000 phenomenon and how it figured into the creation of our ETF separate account management structure back in 1999. You can view the video here.

David R. Kotok, Chairman and Chief Investment Officer

 

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Category: Cycles, Technical Analysis, Think Tank

Nikkei 225: Breaking Out into New Secular Bull Market?

Nikkei 225: Potential breakout into a secular bull market Source: Bank of America Merrill Lynch     We continue to favor Japan’s Nikkei 225. The Nikkei 225 is pushing above the 2007 high of 18,300, which has the potential to end the secular bear market for Japan that began in 1989. This is a focus…Read More

Category: Markets, Technical Analysis

A Rare Technical Analysis Pattern . . .

Source: Dilbert

Category: Humor, Technical Analysis

Emerging-Market Stocks = Cheap

Emerging-Stock Bargain Seen in Commodity Users: Chart of the Day By David Wilson, Bloomberg   The CHART OF THE DAY illustrates how Emerging-market stocks are becoming cheap enough relative to U.S. shares. Jack Ablin, chief investment officer at BMO Private Bank compared the price-to-sales ratios for the MSCI Emerging Markets Index, which tracks shares of companies…Read More

Category: Economy, Markets, Technical Analysis, Valuation

The Year in VIX and Volatility

Terrific graphic from Bill Luby at VIX and More looking at the various potential drivers of volatility:   click for monster chart Source: VIX and More

Category: Derivatives, Markets, Technical Analysis

Why Gold & Oil Are Trading So Differently

Category: Commodities, Energy, ETFs, Gold & Precious Metals, Media, Technical Analysis, Trading, Video