AllAllan - Where It All Began
Let's talk like we used to. It was on my AllAllan blog, back in the early 2000s, a blog full of life, love, music and what can best be described as a disparate, but entertaining window into my world. I miss that blog; I miss that guy.
In the years since I went on to develop a trend following based options trading system which became the focus of my online options trading service, Blue Line Trading, which is pretty much my, "Day job." I've also kept on trading in both in my own account as well as in some longer term managed accounts, including my hedge fund, which has been mostly made up of friends, family, subscribers and colleagues.
One of the things I miss most about those blogs was the ability to write about anything I want, including occasional forays into stock picks and market forecasts, areas I try to avoid in the trading service because we trade the identifiable price trends, based upon mathematics and pattern recognition, not my opinions.
Something Wicked This Way Comes
This weekend is a good time to revisit that state of mind because what happens in the market next will affect everyone, and everything, and probably not in a good way. It's coming and what happened to Facebook this past week, and a host of other social media stocks on Friday, is likely the first sign of change.
If you're counting, I've called five of the two market crashes of the past 18 years. A lessor man would take credit for singlehandedly saving the world from those other three non-crashes, just by virtue of my predicting them. So why should I not predict another one now? Best case, I save the world once again by predicting a market crash event, thus preventing it. Worst case, and in ironic way it's another best case, especially for those who subscribe to my newsletter, or who are invested with me in the hedge fund. Let's just say there will be a lot of puts and bear market ETF's involved.
The market, as well as some this year's most newsworthy stocks, will probably have as many up runs as down runs along the way to ruin, and my systems will correctly and very profitably catch most of these intermediate term trends and counter trends. When the Big Short comes, and it looks be closing in on us, it will catch that as well.
The Elephant In The Room
Market sentiment is pounding the table and we have to pay attention. Never has there been so much bullish enthusiasm for valuing, buying, holding and trading stocks without it being followed by an imminent market decline, often a waterfall decline, sometimes a full fledged bear market (20% or greater loss in the market indices) and rarely, but occasionally, a true market crash.
The correlation between extremes in market sentiment and major, lasting reversals in both directions is so close to 100% that there may as well be a bell, or siren, or air horn sounding off. The only thing extreme sentiment does not do is say exactly when. Even though market sentiment attaches itself to every major top and bottom, it doesn't trade tops or bottoms, that is left to us.
This market top has been just shy of six months in the making. During this time four stocks have been soaking up all of the buying power left in the trading accounts of investors. Everyone already owns Facebook, Amazon, Netflix and Google. Ergo, the extreme in sentiment: If you own those you are bullish, they can only go up, why else would you buy or hold them? And as night follows day, when everyone owns a stock, or the market, there is no one left to buy. Maybe that's why TWTR dropped 25% on Friday, which makes NFLX's 15% debacle on July 17th look like a walk in the park. When markets crash and burn they take everyone down with them. Always have, always will. If you don't believe me, just wait.
The Facebook Prophecy
Last week Facebook reported that it earned $13.23 Billion in revenue, but that missed consensus estimates of $13.36 Billion. They beat earnings forecasts with $1.74 EPS compared to an estimated $1.72 EPS. So what happened next? Immediately after that report the stock was down 22%, losing $120 Billion in market cap.
This is that bell that rings at the top. Every other technical and fundamental warning sign of a serious decline ahead pales in comparison to the insanity exhibited after Facebook's release of earnings, and along with management's tepid prediction for the future. On Friday it dragged a whole lot of other market darlings down with it.
Aside: How To Steal $3.48 Billion
Facebook insiders sold $4.1 Billion FB stock since April 1st. That's compared to $4.7B that they sold in all of 2017. Chief Executive Officer Mark Zuckerberg accounted for 85 percent of the post April 1st total. Spot Quiz: When did Mark Zuckerberg first learn of the weak report that was to be reported after the close on July 25th? If you answered April 1st, you win. Except he won more.
The Moral of the Story
I call this missive The Facebook Prophecy because 6-12 months from now we will look back at this madness and realize that it was the beginning of the end. The end of a 10 year bull market up from the depths of the great financial crash of 2008 and that is what legends and bedtime stories are made of.
Praemonitus, praemunitus.