Trader’s Narrative

This rally reminds me of the Energizer bunny. It just keeps going and going and…

The question everyone is asking is whether this is the real thing or just a really strong bear market rally.

For clues about which it will turn out to be check out these links from this weekend’s reading list at news.tradersnarrative.com:

• Who’s Minding the Store at the Federal Reserve?
• What does the most reliable indicator of long term market direction say now?
• The SEC is unsalvageable
• Yet more evidence we’re in a bear market rally
• Breadth Measures Hitting Historical Highs
• Comparing Bottoms: 1973, 1982 and 2009
• The silence of the bears
• U.S. Bond Market Stays One Step Ahead of Fed
• Is Warren Buffett Brilliant or Lucky?
• Who sez there’s “no free lunch”? Get a Free Subscription to Futures Magazine

Follow the link below to get much, much more:

And remember to check regularly since there are new links added everyday.

Week Ahead: Sell in May?

Ah Sunday, a perfect time to catch up on what you missed and to prepare for next week. (Right after you mow the lawn.) Here are just a few choice readings from the past week’s list at news.tradersnarrative.com.

• Top 10 Questions for Buffet from Jeff Matthews blog, Not Making This Up
• Comparing Sentiment During This Rally & Past New Bull Markets
• Get a 120 page report FREE from Global Market Perspective (limited time offer)
• Why the Market Should Thank Obama
• The Market Doesn’t Have to Be Fair - Lesson From DNDN
• Ideas Trump Crisis: Lessons From 1929
• Tech Stocks Are Coiling for a Breakout
• Conde Nast Shutters Portfolio. Why It Failed
• Who sez there’s “no free lunch”? Get a Free Subscription to Futures Magazine
• 25 Years to Bounce Back? Try 4½

Follow the link below to get much, much more:

And remember to check regularly since there are new links added everyday.

Week Ahead: Capitalism’s Woodstock

Book Giveaway
If you haven’t already, throw your name into the hat for a giveaway of:
Hedge Fund Operational Due Diligence (follow link and submit comment)

In late November 2008, the S&P 500 index was trading at 850, when we looked at a chart of the 10 year rolling returns. The 10 year return back then was -23% - although horrendous, not one of the worst we’ve seen in history. It still made me consider that it was reason enough Why Long Term Investors Should Consider Buying:

Flash forward a few months to take into account the continued erosion of the S&P 500 and we have the updated chart above. Using the most current data, we have a rolling 10 year return of -45.67% (not including dividends).

How bad is that? There are only a few months that were worse. And they were all around the 10 year anniversary of the 1920’s top:

• 8/1/1939 -61.66%
• 9/1/1939 -59.20%
• 7/1/1939 -58.88%
• 4/1/1939 -57.16%
• 6/1/1939 -56.29%
• 5/1/1939 -56.24%
• 5/1/1940 -55.81%
• 6/1/1940 -55.07%
• 10/1/1939 -53.91%
• 7/1/1940 -52.56%
• 4/1/1940 -51.81%
• 3/1/1939 -51.28%
• 8/1/1940 -50.94%
• 2/1/1939 -50.38%
• 1/1/1939 -49.72%
• 3/1/1940 -49.25%
• 9/1/1940 -48.85%
• 2/1/1940 -47.03%

The monthly data I used went from January 1st 1910 to present (March 1st 2009) so what we are saw as a 10 year simple rolling return is in the worst 1.5% of months for almost 100 years.

Just imagine the stories you’ll tell your grandchildren about the Great Decession. And all the major players: Madoff, Bernanke, Bush, Obama, Greenspan, etc. These are truly historic times we are living through.

Some have written me and questioned the validity of the original market call back in November 25th, 2008. As way of explanation, let me say first, that unlike a loud TV personality, I don’t pretend to know what the market will do - nor am I claiming that you should in me trust (cough Cramer cough). You should base market decisions on your own due diligence. Taking into account something I write is fine, as long as you do your own thinking afterward.

In any case, I made it clear that this was intended for long term investors. Not traders. Long term investors can still make a killing even if they are off a bit. You are either going to get in early, and share in the continued decline of the market, or you’re going to get in late, and pay opportunity costs. But if your time horizon is 25+ years, you don’t really care about a few percentage points here or there, your aim is to catch the big wave.

Even if you disregard the chart above and the fact that we are going through a rare and magnificent opportunity, you have to sit up and take notice when great market timers like Barry Ritholtz, Doug Kass, Jeremy Grantham, Warren Buffett, etc. turn bullish en masse.

While the transportation sector has been going strong, the airline industry - a sub-sector of transports - is scraping the bottom of the graph at multi-year lows.

Imagine how well the transportation index would be doing if the airlines had been contributing or at least keeping up with the rest of their peers. Accounting for almost 11% of (dead) weight, the following airlines are in the Dow Jones Transportation Index:

• AMR Corp. (AMR)
• Continental Airlines Inc. (CAL)
• JetBlue Airways (JBLU)
• SouthWest Airlines (LUV)

Recently there’s been some turmoil in this sector with a few bankruptcies, fleets being grounded and just today, Northwest Airlines and Delta decided to merge. This sort of shake up is common place in this sector and it happens ever few years. Airlines are a notorious black hole for capital - even the sage of Omaha, Warren Buffet lost his shirt when he strayed too close.

But do the extremely “cheap” airline stocks mean that this sector is a buy? or put another way, are they cheap enough?

From a fundamental point of view, I can’t say that I have a clue. But from a technical perspective, I don’t think so. Here’s why:

The really important double bottom that was formed in the end of the last bear market was at 30. In January 2008, the AMEX Airline Index (XAL) ricocheted higher after grazing the same level. But in contrast to before, the ensuing rally was short lived and it subsequently fell below that important support line.

So right now the index is approaching the 30 level again but now it is facing it from below, as resistance, rather than support. That’s an important distinction.

Also, it is no longer in step with the parent sector (transports). The bullish percent index for the Dow Jones Transportation Index is at 55% while it was at 15% and lower in 2003. I am too lazy to look up the Airlines bullish percent index but my hunch is that it would be wallowing in the 10-20% range.

So I wonder… why does the market shrug off all the reasons why the land and sea transportation companies’ stocks should be sold (high energy costs, recession, etc.) but not the airlines?

Finally, taking a look at the component stocks tells me that they are either below or far away from a base or support level. Take for example, JetBlue (JBLU): In March 2003, when the airline sector put in its major multi-year bottom, JBLU traded at $10/share. It is now trading at $5.18/share. Almost half that level.

The opposite could be said of AMR because it traded at $2.50/share in 2003; which means that it still has a lot of potential room to fall from its present level of $9.34/share.

Interactive Brokers Group (IBKR) went public a few months ago with a lot of buzz. Most of the attention was on the Dutch auction process they had chosen to go with, instead of the regular Wall St. investment bank route.

I’m not sure whether it was due to the process they chose, or the fact that the market got lethargic right when they debuted but the IPO sputtered.

A lot of people, had high hopes for IB but it ended up a disappointment. I even put in an offer but it didn’t get accepted because I was too stingy.

I took another look and noticed that it has carved out a fair head and shoulders pattern on the daily chart:

With today’s rumour of Warren Buffet’s involvement in Bear Stearns (BSC) the whole financial sector got a shot in the arm. I’m not sure if the rumour is true or not. There have been quite a few floating about.

In any case, I wouldn’t be surprised. BSC has all the hallmarks of a classic Buffet investment: beaten down sector, temporary dislocation, high barriers to entry, valuable name brand, loads of value, and loads of cash flow.