Feb 25/15 – Brave, or “ordinarily” foolish?

2015-02-25 9am EDT  |  #AAPL #EEM #GMO #stocks #XBI

When it comes to the stock market, lately I have been sitting on the sidelines watching the relentless rise with a mixture of awe and incredulity. The Nasdaq has been especially memorizing.

This rise has been remarkably one sided. It has been a mad drive higher.

I think we are now in the 9th or 10th day of the index closing higher. I am not sure which – it doesn’t really matter. We are well into the stage where the bulls are so far out over their skiis that you know the late comers to the party will get tagged.

In the picture at the top of the letter there is a warning about the difference about being brave and just “ordinary” foolish. I don’t know which I am being, but I think it is time to pull out the pink tickets.

Yesterday was the first day in a month that the market leaders did not close at the highs. Have a look at the daily chart for the XBI Biotech ETF:

That big spike higher accompanied by a big reversal makes for an ugly looking chart.

And even Apple, which has been consistently opening on the lows and closing at the high finally had a down day yesterday.

This pause by the market leaders is troublesome because this rally has been especially narrow. Have a look at this great infographic from ZeroHedge:

These five stocks account for the bulk of 2015’s gains for the Nasdaq. Given that Apple is now the largest publicly listed stock in the world (by a factor of two), it has an extraordinarily large impact on the market weighted indices. The amazing drive higher since their earnings announcement has been one for the record books. It was only at the end of January that Apple was trading at $109. We are now $23 dollars higher. Apple’s market capitalization has risen by $134 billion in that time. To get a sense of that rise, Amazon has a total market cap of $175 billion. So in one short month Apple has added of an Amazon.

But the sentiment has gotten a little too frothy. We are getting some really late stragglers jumping on the bullish bandwagon.

I don’t know much, but I know that markets often top out of nowhere when no one is expecting it. All of a sudden the sellers gain control, and the next thing you know, the gains that have been accruing over the space of a month get halved in one or two days.

Yesterday was the first day in a long while that the bulls were no longer fully in charge. I have been waiting for this signal, and now here it is. I am diving into the market palms outward.

Maybe I am being foolish (the ordinary kind?), but I think the bulls have pushed their luck and due for a reminder that stocks also go down.

Yet I still like Emerging Markets

Even though I am making some short sales in the US stock market, I am still bullish on emerging markets. Yesterday the EEM ETF broke out to the upside. It had been languishing, but it finally managed to clear up into new weekly highs.

This long call has so far been a real dud. The EEM has reluctantly been climbing, but the fireworks have all been concentrated in the US market.

But I have not given up with my theory that the US stock market is priced too optimistically while the emerging markets have a fair amount of pessimism built into them.

I take solace in the fact my favourite quantitative shop GMO has the emerging markets as their most attractive equity class in their latest forecast.

I am hopeful that the EEM rally has just started when the US stocks might be rolling over.