WASHINGTON, March 3, 2015 – The Maven, like so many others, is getting incredibly frustrated with this stock market. It’s up one day, one day down, up, down, rinse, repeat. Yesterday, after a weak opening, stocks generally closed up. Today, guess what? Yep. Stocks are, for the most part, getting hit every which way but up.
It all reminds us of that wondrously absurd “Caucus Race” we encounter early on in Lewis Carroll’s always-entertaining “Alice’s Adventures in Wonderland.” Because the Maven is pressed for time and incapable of being brief, here’s an excerpt from what Wikipedia says on the subject:
“In order to get dry after a swim, the Dodo proposes that everyone run a Caucus race — where the participants run in patterns of any shape, starting and leaving off whenever they like, so that everyone wins. At the end of the race, Alice distribute comfits [confections] from her pocket to all as prizes. However this leaves no prize for herself. The Dodo inquires what else she has in her pocket. As she has only a thimble, the Dodo requests it from her and then awards it to Alice as her prize. The Caucus Race as depicted by Carroll is a satire on the political caucus system, mocking its lack of clarity and decisiveness.”
There is so much good information buried in this paragraph that we’re tempted to digress, particularly on the political “clarity and decisiveness” part. But the real focus here is the market, which, in fact, has become an actual, real-life Caucus Race lately, save for the fact that there are actually many losers whose portfolios continue to shrink as they run round and round.
What charts are telling us is that stocks in general are getting “congested.” That is, they’re trading up and down, up and down in ever-narrower ranges and bands, indicating that at some point soon, they’re either going to rocket up or plummet down, big time. The negative angle is reinforced when you look at the charts of numerous representative stock group ETFs or even the stocks themselves.
An example of how a bearish descending wedge looks appears below in an old chart of Dell Computer (DELL), which, as many readers will know, is no longer publicly traded.
More often than not, as the wedge narrows, the tendency of the stock is to suddenly fall pretty much without notice, although, if the wedge gets impossibly narrow, you know the time is nigh. As with everything in chart-ology (technical analysis), the charts can and are wrong. But so many people use them nowadays that they often become self-fulfilling prophecies.
Specifically, we have begun to see these bearish descending wedges and other equally negative patterns in stocks and representative ETFs, indicating that at least near-term, we’re likely to get hit hard with a 5-15% downdraft. We just don’t know when.
The charts are saying “Very soon.” But we’re not quite in “sell in May” territory yet. Furthermore, tech stocks and small caps are to some extent resisting this trend, while large caps are getting hurt, given that international sales profitability is going to get nicked by the ever-increasing dollar, added to our inability to export our surplus oil, courtesy of, you guessed it, Washington.
What’s more problematic here is a considerable weakening in one of the engines of the still somewhat ongoing 2-year rally in healthcare stocks. The profits here have been generous indeed, but nothing goes up forever.
Drug companies and insurance companies made a devil’s bargain with Harry Reid’s and Nancy Pelosi’s old Democrat mega-majorities to cram the wildly imperfect Obamacare (ADA) Frankenstein monster down an unwilling American throat. But an upcoming Supreme Court decision, likely to show up in June, could upend the whole monetary spoils system by actually interpreting the law as written: i.e., no insurance subsidies will be given to constituents of states that don’t run their own exchanges.
Despite Democrats’ pooh-poohing of this “technicality,” which the Obama Administration’s Gestapo-like IRS was clearly told to ignore, the law was intentionally written that way to coerce the states to set up their own exchanges. But, knowing a structurally bad deal when they saw one, fully 37 states opted out, meaning their citizens would have to use the general Federal exchange system and software.
That should have meant no subsidies, for this is an Administration and Democrat Party that believes in roundly punishing dissent. But that got waived—since the Dems had to get through another electoral cycle. If what the Administration has on Chief Justice Roberts doesn’t work this time as it did the last time he unexpectedly bailed them out, we’re looking at a very real mess in June.
Which—getting us back to those healthcare stocks—might be at least part of the reason they’re backing off from their highs right now. We’re still in that sector, via the healthcare ETF (XLV). But it’s getting wobbly, and we may be forced to bail soon. That’s because if this one tanks, nobody will want to look at the bloody body parts at the bottom of a very steep cliff.
Today’s trading tips
We’ll have more to say about Obamacare and other matters in other columns. But right now our main point is, unless you’re a day-trader and a good one, it’s best to sell a few profitable positions, pare mildly negative ones that look like they’ll get worse, and raise some cash.
Even the Maven, despite his obvious brilliance and insight, is finding it tough to make even a few bucks right now without taking undue risk. Trading is simply getting Dumb and Dumber as the HFTs jack stocks up today and take them down tomorrow on low volume, indicating real investors are staying home. With that kind of mindless and obvious manipulation going on, our main tip is—go and find something else to do for awhile. You’ll lose less money.
* Fair use. Example taken from educational section of Stockcharts.com, a subscription-only, copyrighted service to which the author subscribes. We encourage serious investors to subscribe to this inexpensive but comprehensive service or a similar service, particularly if they invest through a discount brokerage, and we get no fee or discount for making this recommendation. Remember: the author tells you what he’s up to in these columns and why, but you’re on your own when it comes to individual buy and sell decisions.