Forget the Patriots. Equities are in their own “Deflategate”

Averages flat to down in Thursday trading, while bond yields continue to rise. “Sell in May” now in full force, but dead cat bounce likely soon.

Pile of deflated footballs.
Pile of deflated footballs looks just like this week's stock market averages. (Image via the "Patriots are Still Cheating" Facebook page)

WASHINGTON, May 7, 2015 – In the sporting world, New England Patriots “Deflategate” stories are popping up again, as in “what did (he, she, it or they) know and when did (he, she, it or they) know it?”

Metaphorically, Wall Street seems to be in its own version of Deflategate this week, if Thursday’s gummed up morning trading action offers any clue. But in this Deflategate, no one who knows what’s really going on is ever likely to rat out the rest of the insiders and profiteers.

What we can see, however, is that the miserable 2015 stock and bond trading environment has entered yet another one of its profit-killing mood swings, this time likely having to do with “Sell in May” syndrome arriving precisely on time coupled with Round 2 of “Taper Tantrum,” wherein unhappy bulls and gleeful bears (and short sellers) are not so quietly letting the air out of everything on sale.

As the air comes out of this metaphorical football, bulls are hard-pressed to make a case for a sustainable upside reversal in the market’s direction. Yesterday’s hard selling took averages (and the reliable, mood-tracking McClellan Oscillator) down from oversold to extreme oversold conditions, meaning at least a dead-cat bounce is close at hand.

But when we get that bounce, freaked-out bulls are more likely to hit the “escape” button on what’s left of their battered holdings rather than engaging their almost Pavlovian BTFD (Buy The Effing Dip) behavior that served them well during 2014’s massive bull move.

With oil prices now entirely unpredictable, Greece in its perpetual motion state of turmoil, the Obama Administration operating in full Marxist-redistributionist mode, and with America’s New Feudalism becoming increasingly manifest, it’s no wonder people are confused. So the tendency is to exit this market however one can.

We confess to having done a good bit of this ourselves. When stocks go down this ruthlessly in pretty much every sector—including the ones that are making a lot of money—it’s better to leave earlier rather than later if you’re an active trader. Shorting is still pretty treacherous for the average investor.

But getting long doesn’t seem much better with so many fat cats eager to unload their holdings before spending their summer on a yacht in the Riviera. When the HFTs are also on board, fighting this tendency is simply too fraught with peril.

Those perma-bulls getting on the other side of this exit stampede are likely to meet the fate of the Irish hero Cuchullain, who unsheathed his sword and waded into the sea to fight back the tide. Fans of Irish myth know well the outcome of that particular altercation. Those not familiar with the story should be able to figure out how it ended. Think “hubris.” That’s not something we indulge in here.

Again, no trading tips today. What’s the point? Every move, long or short, seems to turn out badly, so it’s best to stand clear.

That said, we still occasionally fish in IPO waters, at least for those promising IPOs our broker can get hold of.

Yesterday’s IPO action was interesting, in that one IPO we put in for—an extremely speculative, money-losing biotech, Klox Technologies (proposed symbol: KLOX) was actually pulled last night, and the offering indefinitely postponed. Word on the Street was that the offer was “badly undersubscribed,” meaning that nobody wanted it, a mood likely intensified over the past two weeks by the brutally violent selloff in the admittedly overpriced biotech sector.

On the other hand, against our better judgment, we picked up a small position in a secondary offering of Forest City (FCEA or FCE/A), a giant, Cleveland-based development company with major projects in America’s biggest cities. The stock pays no dividend and has been a serial underperformer.

But there’s a catch: the company is going full-speed-ahead on completing its conversion to REIT status with a goal of achieving it by January 1, 2016. Given the high quality of Forest City’s buildings and projects, including the large Navy Yard redevelopment effort near Washington Nationals Stadium here in Southeast DC, the eventual payouts from a Forest City REIT should gradually become quite impressive.

The stock is likely to remain flat-to-down in the meantime, given the current death-march mode most REITs are enduring at the moment. But the panic should be wrung out of this sector by next year, so Forest City become an interesting if speculative long-term hold until we see what really happens.

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