I remain bearish and net bearish and net short as we get ready for another trading week to begin.
I recently substituted my short of the SPDR S&P 500 ETF (SPY) with out-of-the-money SPY puts. This strategy increases my delta and short exposure as stocks fall, which is what I want right now for a multitude of reasons that I've previously outlined in my diary.
The most important reason is that I believe that for the fourth consecutive year, consensus S&P 500 earnings estimates are simply too high. So are price-to-earnings multiples that fail to incorporate the more-subdued profit picture, the likelihood of a Federal Reserve policy error and the wobbly global growth, political risks and possible geopolitical threats that our flat and interconnected world faces.
And as I've recently emphasized in my diary (and in a recent Bloomberg Radio interview), the "negative wealth effect" of lower stock prices could push the U.S. economy over the cliff and into a recession. My current odds are for a 35% chance of a "garden-variety" recession and a 15% chance of a deeper recession.
(For more Doug Kass on Real Money Pro, sign up and save on this premium product today.)
What I Expect in Coming Days
As for today's session, SPY will likely fill the $186 gap and the S&P 500 will probably fill its previous recent closing low of 1,859. However, I think a $181 "capitulation low" for SPY and a 1,810 intraday for the S&P 500 are still a distance away.
That said, perhaps we'll see a "flush" towards a capitulation low in the days ahead if (as my RealMoneyPro colleague James "RevShark" DePorre suggested this morning) we see more disgust and dismay that "clears the air."
I continue to think an 1,810 low for the S&P 500 will hold, but we'll see. The CBOE put/call ratio has dropped from 1.18 to 0.96 over the past three weeks, while other sentiment indicators are exhibiting less bearishness and reduced fear --concerning signs.
Notably, there's been a clear rotation in the last week that investors can take as either a positive or negative. Specifically, the U.S. dollar's weakness has helped the oversold sectors of commodities, energy and materials-and-manufacturing stocks while hurting the TFANGs and technology.
To me, it's still an open question as to whether this leadership change is sustainable, although I recently added exposure to DuPont (DD) .
My Take on Friday's Schmeissing
"In terms of Friday's action, sure it was ugly, but it was highly concentrated in those fan faves. The selling barely registered outside of those stocks.
The clearest example I can provide for that is the number of stocks making new lows. Friday's action on the NYSE saw 169 new lows with the S&P at 1,880. The last time the S&P was in this area one month ago, there were 1,375 new lows. Heck, last Wednesday had 227 new lows, so there were even fewer new lows on Friday.
So, ask yourself this: If the S&P breaks 1,875 this week, do you think we will see more than 1,375 new lows on the NYSE? I'm in the camp that says it is unlikely and that would make it a positive divergence."
-- Helene "The Divine Ms. M" Meisler, Friday's Market Wasn't as Bad as It Looks (Feb. 7, 2016)
The S&P 500 shed some 1.8% on Friday to close at 1,880, within 1% of my fair-market-value calculation. I remain defensive on the major trend for now, but like Ms. M, I'm going to be closely watching the "quality" of the decline. I think that could result in a successful test of the S&P 500's recent low.
The NYSE's new-52-week-low list hit 1,395 issues on Jan. 20, the same day the S&P 500 hit an apparent "capitulation low." But the number of new lows on Friday was meaningfully below that. A successful test should consist of substantially fewer new lows.
Let's briefly do a deeper dive into Friday's schmeissing and how it affected my portfolio recommendations:
Naturally, being net short produced good returns. Starbucks (SBUX) -- which I added to my "Best Short Ideas" list 10 days ago -- fell by nearly $4 a share, while the TFANGs were in a free fall. Tesla (TSLA) lost $7 a share, while Amazon (AMZN) dropped $36 and Netflix (NFLX) shed $7.
(Go to Growth Seeker for updated analysis of Amazon.)
Life insurers were also downside leaders, with my "Best Short Ideas" candidates Lincoln National (LNC) and MetLife (MET) trading at new 52-week lows. Among my other short holdings, Apple (AAPL) and Walt Disney (DIS) continued to fall, but Comcast (CMCSA) fought higher for the second day in a row.
(Jim Cramer's Action Alerts PLUS owns Starbucks and Apple in its portfolio.)
As for my long holdings, banks got clipped, but their price decline seems to be slowing. Oaktree Capital (OAK) was actually $0.50 on the day, while the Blackstone Group (BX) -- a recent buy for me -- was up on the day.
Among other longs, Potash (POT) and Radian (RDN) were virtually unchanged, while speculative biotech Intrexon (XON) was higher -- continuing its move upward during a tough week. Insurers Allstate (ALL) and Hartford (HIG) also rose, while brokerages Goldman Sachs (GS) and Morgan Stanley (MS) were relatively untouched. Procter & Gamble (PG) was higher on the day, while DuPont (DD) was down by only a small fraction.
The Bottom Line: T.I.N.A. Is B.S.
For most players, this remains a time to err on the side of conservatism. The reason you maintain high cash reserves is for a rainy day -- and it's certainly raining now.
Cash is an asset class that provides a good defense (like the Denver Broncos).
And don't forget that T.I.N.A. -- "There Is No Alternative" to stocks -- is B.S.!