Based on volume in some of the double short ETFs yesterday, it looks like the easy money is to short the stock market and ride that all the way to the bank.  But, before you hit the sell button and run out and buy some of these, let’s examine the market for a minute.  First, we’ve definitely had some technical damage.  The downtrend in the dollar has broken and that has caused many to run for the exits from commodities, stocks, emerging market, etc.  The uptrend since March has broken.  Countries are starting to raise interest rates.  There are some things to be concerned about.  But, I’ve said though on my radio show, there still aren’t signs of a long-term top….yet.  So, whipsaw risk is very high (buying high and selling low).

So, if you want to protect yourself even if it’s for the short-term, selling is always the best hedge.  Nothing will protect you as much as just selling.  But, there’s always tax consequences and other considerations so buying put options is another option (no pun intended).  The third option and one many of you use all the time is to buy an inverse ETF (1, 2, or 3 times the opposite of the market).  I use these all the time and they work.  But, they work better when the direction is smooth in one direction.  With the volatility in the last few days, we’ve had anything but a smooth move in one direction.  SDS & TWM had a great day on Friday and week but remember that if the market continues this seesaw pattern, the protection you think you’re getting will erode.  Use them at your own risk.

Today’s GDP report was better than others expected.  I say others because we’ve been pounding the table on the economy for months.  And guess what?  It’s going to keep getting better for the next few months.  We’ve been prepared for better than expected economic releases.  I gave a speech yesterday and said that today’s report of GDP would be important.

The GDP growth rate came out at 3.5%, better than the estimates.  The stock market responded with some impressive gains a few hours after the report.  By the time this recovery runs its course, we could see this number reach 5%.  It’s not uncommon to get a better than expected recovery because you had a worse than expected contraction.  As opposed to a lot of the reports that don’t mean much, this one is important as it pertains to stock prices.  You can see below, as GDP growth rate goes (in red), so goes the stock market (S&P 500 in blue).

I described the wall of worry a few weeks ago that is continuing as I type.  I’m reading  a lot of commentary from people suggesting that this is a backward looking number and doesn’t mean much.  It may be a lagging indicator but it certainly is correlated with stock prices.  That’s all we care about.  The doubters of this good report obviously haven’t done their homework.  Luckily, we have.

Over the past couple of weeks, I’ve been taking some profits in real estate and financials as we began to see some red flags.  There was nothing major screaming to sell everything.  But, being prudent and locking in gains never hurt anybody.  It looks like I’m not the only one taking profits.  The indices were down from .5% to 1% today.  Now, we’re within just a few points of breaking the uptrend that’s been in place since March on the S&P 500. If you & I see this, certainly all those fancy computers in New York see the same thing and the sell orders may multiply making the sell off pick up steam if we do break those technical levels.  The volatility has been very low lately and I don’t expect that to stay this way forever.

More importantly than the charts though, which really haven’t helped anyone make money during this rally, are the underpinnings.  As I’ve been discussing on my daily radio show, we were vulnerable for a pullback but signs of a major top aren’t present.  There have been too many stocks still making new highs and frankly just too many stocks going up compared to the ones going down.  In other words, the market has continued to spread out.   That usually turns down 4-6 months in advance of a major market top.  However, that doesn’t mean we can’t get a “real” correction in the meantime.  When I say “real”, I mean one that really makes everyone question if this is the end of the rally.  We haven’t had any type of meaningful correction since June when the indices fell about 10% from top to bottom.  Some may say we’re due.

As far as the underpinnings, the stock market may (keyword may) be entering the more selective stage.  That means the easy money has been made and investors begin to cull out weak stocks or lock in profits on strong stock and re-allocate to other areas.  It’s a natural progression of a longer-term rally.  That doesn’t mean we’ve peaked for the year.  However, it means that owning huge baskets of stocks & bonds, which has worked beautifully for months, may be coming to an end.  It’s simply too early to tell.  But, the internals have begun to weaken ever so slightly.  Are sellers finally willing to sell some of their holdings?  Something to keep an eye on in the days ahead.

U.S. Dollar

There have been so many bears on the dollar including myself which has made me cautious that we could get a violent countertrend rally in the dollar causing sell offs in materials, commodities, emerging markets, gold, etc. Today, a rally in the dollar caused just that.  For the short-term, it may just be the beginning.  The Powershares DB U.S. Dollar Bullish Index ETF (UUP) was up on enormous volume both on the ETF & the options of the ETF.  It’s very close to breaking out (see below) and this could be a nice trade (I’m still very pessimistic about the dollar longer-term) especially as a hedge against those positions we want to keep but could fall in price based on a rising dollar.  Therefore, I’m watching it closely.

Moneyfair

Just a quick reminder that I’ll be speaking at the Biz Radio Moneyfair this Wednesday in Houston, Texas.  I’ll be speaking at 4:00 p.m. CST.  If you’d like to attend, just sign up here.

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The Biz Radio Moneyfair is coming to Houston next week.  Click here for more information.

It’s been interesting the past few days to watch the earnings released.  Last quarter, the consensus was that the earnings were all about cost cutting and no revenue growth.  Everyone was worried, yet the stock market continued to rally.  The S&P 500 is up about 15% or so since last quarter’s earnings season.  Now, the earnings are supposedly great with top line growth and yet the stock market isn’t rocketing higher.

It’s not about the earnings.  The rally has been based on a global economic recovery with unprecedented simultaneous global stimulus.  Nobody knows how strong the recovery can actually be because we’ve never seen this type of stimulus and government spending before by so many nations.  That will all end at some point and the U.S. economy will have very mediocre growth, but not yet.

As far as the equity markets, I don’t suspect there will be a major selloff anytime soon because there is simply not enough supply.  Investors aren’t willing to sell aggressively at these levels and when there are dips, there are plenty of buyers who are still being converted from cash to stocks.  A sell off of up to 10% can happen at any time for any reason and I don’t see why we wouldn’t have a correction soon.  But, I believe over the next few months we will see higher prices for equities.  Instead of a major sell off, one possibility is simply a rotation of sectors like technology & financials and into areas like agri-business, utilities, & energy.  I’ve been taking some profits in the past few days as we know markets can be irrational.  A quick violent sell off would cause me to invest every spare penny in equities.  In addition, a weak sell off where the “overbought” condition works itself off would also cause me to invest more heavily.  For now, I’m monitoring all my positions very closely.

Television

I’ll be on CNBC Asia tonight at 6:10 p.m. CST and Bloomberg Television tomorrow morning at 8:10 a.m. CST.  Make sure you tune in.

I get a lot of calls every day on my radio show about sugar.  It’s been one of the commodities I’ve owned specifically over the past few months.  Just recently, I sold my holdings in it to lock in profits and see if I could re-enter the trade at lower prices.  This was in direct conflict with the fundamentals which continue to improve and give investors no reason to sell.

As you can see from the picture below, sugar (using the ETN SGG) has been in a down trend for a couple of months.

We’ve had two sharp sell offs in the past few months but both were opportunities to buy the shares cheaper and the ETN rallied soon after.

So far, the fundamentals have won out.  Keeping it based on the fundamentals (rising sugar prices for supply/demand reasons) has been the right move.

If you aren’t in sugar right now and sitting in cash (as I am), you have to at least wait now until the downtrend changes.  We’ll know the answer to this very soon as we’re now back at the top of the range.  I’m patient in watching to see if there’s  a better entry point.

Strong fundamentals sometimes trump any technicals and we certainly have that happening right now in sugar.

More and more people swapping out their old phones for new advanced phones that can check e-mail, text message, send pictures, receive video, etc.  The iPhone from Apple accelerated this process a few years ago.  It’s becoming so popular, Dell has decided to enter this business as well.  Since we’re seeing more players in this space, how will that impact Apple, Inc., the leader?  Recent reports are showing Apple is actually taking market share from other carriers including Research In Motion (RIMM), which is why RIMM fell so much a few weeks ago.

This morning, Nokia (NOK) reported a loss of over $800 million.  They haven’t kept up with the smartphone movement and it’s showing.

I’ ve always been a big fan of pairs trades where you go long one stock and short another.  AMZN vs. BBY is an example that has worked.  Below is a picture of AAPL vs. NOK since 2005.  NOK is flat since that time while AAPL is up 250%.  I think this trend will continue as long keeps taking market share.

Yesterday, the Blackstone Group (BX) announced they may take up to eight companies public and sell five more to take advantage of the good stock market.  This caused the stock of the Blackstone Group to go up about 8% in just on e day.  Everything sounds great until we really think about this.  Aren’t these the guys that went public in 2007 right before the stock market peaked?  Aren’t these the guys that fetched the highest price the stock has ever seen on the day of the IPO?  Aren’t these guys considered the smartest guys in the room?  The answer is yes, yes, & yes.  That’s why I own them.  I didn’t buy them when they went public.  I waited until they fell.

At the time they went public, everyone wanted a piece of the company.  Everyone wanted to join them.  But, they are simply selling their stock to you.  Yes, you are a partner but they are selling shares to you and you better believe they want a good deal.

Below is the picture of BX since its IPO in 2007.  It went from the mid $30s to around $4 per share last fall.  It’s since recovered but is still 50% below the IPO price.

So, here they are saying they want to take up to 8 companies public that they own.  Could this be a warning sign of things to come for the equity markets?  The short answer is yes.  They aren’t taking these public tomorrow.  This will take some time to do.  Perhaps several months.  At some point, the stock market will have fully discounted the economic recovery and stocks won’t be a good deal anymore.  This will probably coincide when many of these IPOs from Blackstone are hitting the market.

These guys aren’t stupid and it’s worthing watching what they’re doing.  It’s just a red flag.

Disclosure:  I own the shares personally & for clients.

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