Saturday, September 6, 2014

U.S. Stock Market: Good News Is Bullish, Bad News Is Bullish ??

For bearish traders and investors, Friday was a tough day. Early morning losses in most share prices proved short-lived and two major closely-watched indexes actually rebounded to post new all-time record highs (the Dow Jones Transportation Average and the S&P 500 Index).

While it has always been difficult (and sometimes impossible) to predict where stock prices are headed, now it's even a challenge to explain share price movements after the fact! Bad news (i.e. wars, famine, macro-economic melt-downs, debt crises, political scandals, droughts, polar vortexes, revolutions, negative corporate earnings, Fed tightening, record IPO's, overbought technicals, extreme sentiment readings, etc.), no problem, buy stocks! Good news (i..e. dovish Draghi, dovish Yellen, positive corporate earnings, ongoing share buybacks, cease fire I, cease fire II, cease fire III, cease fire IV, etc.), excellent, buy stocks!

Early weakness in U.S. stocks on Friday could have been related to the "less than positive" U.S. Employment Report, as released by the Labor Department at 8:30 AM Eastern Time Friday morning. Or maybe it was Thursday's unfriendly hawkish rhetoric on monetary policy from the new Cleveland Fed President Loretta Mester that weighed on stocks. Or maybe traders and investors sold stocks early Friday thinking that weekend news from the Mideast and the Ukraine might not be favorable. Whatever the reasons for the Friday morning swoon, the tone quickly changed as buyers stepped in and most major indices fought back into positive territory by mid-day. The rebound and subsequent rally picked up steam in afternoon dealings and most stock indexes ended Friday at their highest levels of the day.

I am not sure what time on Friday Goldman Sachs reversed its short-term view on stocks from bearish to bullish, but this may have also been a factor in Friday afternoon's rally. In July, Goldman Sachs (GS) issued a research report indicating that U.S. stocks were 30% to 45% overvalued, but now GS thinks that Q-4 2014 will be great for stocks (+3.3%) and the 12-month view looks even better (+12.0%). I wonder if the upcoming Alibaba IPO has anything to do with Goldman's change of heart toward U.S. equity prices. Goldman has been named the "Stabilization Agent" for Alibaba's historic Initial Public Offering (potentially the largest IPO ever at $20+ Billion).


Let's talk about Alibaba for a moment. The much-touted "road show" for this IPO begins this coming week and the IPO itself will probably be launched the following week (perhaps September 18th). Early reports indicate that $20 billion to $24 billion will be raised in this IPO and that Alibaba's market valuation will then be in the neighborhood of $150 Billion to $160 Billion. Of course, this IPO will almost certainly be oversubscribed and then quickly trade with a premium of at least 25%, which will take BABA's market valuation north of $200 Billion! If I had to guess, I don't think Goldman Sachs will be stressed as the "stabilization agent" for this particular IPO. Just a guess on my part!

So where does that leave the bearish camp in terms of the U.S. stock market?

Stressed, very stressed, to put it mildly !!

While I am sure there is a potential catalyst out there that will upset this bullish applecart, I just don't know what it is right now. In July 2014, my computer trading system triggered monthly chart sell signals in most major stock market indexes for the first time since July 2007. Among the 30 component stocks of the Dow Jones Industrial Average, monthly chart sell signals are now in force in 10 separate stocks, and weekly chart sell signals are now in force on an additional 7 stocks. The DJIA itself is also now on a monthly chart sell signal from July 2014.

While clearly among the "lost sheep" in this incredible bull market, I am not convinced that the right path is to now follow BABA and Goldman Sachs into the promised land. Instead, could Goldman Sachs actually be the proverbial "Pied Piper" for stock investors now? I think so!

Postscript (added Sunday, September 7th): Will Scottish voters choose independence on September 18th? Add this increasingly likely scenario to the list of potential Black Swans for the global financial markets. And just for fun, let's add the unlikely event that the Alibaba IPO will not be well received next week to the growing list of potential Black Swans. With a possible market valuation of $175 billion, BABA is a "must own", right? I guess we will soon see! And one last minor thought...if I may be so bold. It looks to me like Russian President Putin is 100% confident now that neither the U.S. nor NATO will take any substantial military action to stop him in Ukraine. So what's Putin's real and final objective there? Kiev is the answer, of course! Restore ousted President Viktor Yanukovych to power in Kiev, that's Putin's goal, and I for one don't want to bet against him! Yes, let's add this "speculative" scenario to the list of Black Swans!

What's it going to take to break this market? The answer may be as simple as a change in just two critical supply and demand factors. The supply side is relatively easy to measure. While secondary offerings are part of this picture, the main variable is Initial Public Offerings (IPO). We're on track for a record this year so far with more than $100 billion in IPO's year-to-date, and then next week we can expect the largest single IPO on record in the form of Alibaba at around $24 billion. The second critical variable is on the demand side. I am referring to corporate buybacks, of course, and here we may have the key piece of the puzzle. With more than $300 billion in corporate buybacks so far this year, bullish market strategists should perhaps change their speech from "Don't fight the Fed!" to "Don't fight corporate treasurers!". However, the latest research from Societe Generale strongly suggests a major tone change from this key factor in the future path of stock prices. The chart below says it all, and it's not a pretty picture for U.S. stock prices:




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