On Friday, January 3, 2014 I issued public comments about Twitter (TWTR) and BlackBerry (BBRY) that were based on price and those comments were contrary to the media perception. This article will update both of those calls and incorporate a market-based evaluation of price to help investors understand what to expect from the market itself going forward.
First, I recommended that anyone holding Twitter sell their position, and although I recommended this to private clients with the stock above $70.00, when I made this public statement the stock was testing $70.00. Since that call, the stock is down — it has been as low as $56.00 — and at the time I wrote this article it was trading at about $61.00.
Thus far, the stock has declined between 10% and 20%, but the rationale wasn't because of Twitter's product. It had nothing to do with management — it was solely based on price. Twitter ran up, very aggressively I might add, and triggered sell signals. Those sell signals prompted my recommendation to sell when the stock was above $70.00.
At almost that same time, I issued a recommendation to buy BlackBerry. The stock was about $7.40 when I issued this call publicly, but the stock was lower than that when I issued it to clients privately. Still, BlackBerry rallied to test $9.00 after the public call was made, and it was currently trading at about $8.50 at the time I wrote this. The price of BlackBerry increased between 10% and 20% since the time of the public announcement of this call. But, again, this call was made based on price.
For each of the above calls, the targets that I have conveyed to private clients are also based on price that should prove that price matters. But this article is about the market too, and a price evaluation of the market tells us that the market, not unlike many of the stocks that we know, has run up aggressively.
Purposefully, I will use very generic terms to convey my message in this article, but keep in mind that my specific science is technical analysis, one that believes that the most important thing to making money in the stock market is price, and therefore the arguments that many may have about the fundamental aspects of a company, the economy, or the stock market itself will do little to influence my decision to buy and sell when those buy and sell decisions are based on price.
In calendar 2013, the market moved straight up so individual investors could have almost bought anything and made money. In environments like that, the concept of paying attention to price seems to play a diminished role, but this always matters, and eventually it will matter much more than many people think right now.
In fact, I would go so far as to say that the market thus far in calendar 2014 is showing signs of being extremely vulnerable after an aggressive run, and, based on price, it is set up for a decline. I have been warning about the risks in the market for quite some time, and those risks have not gone away, but they certainly have been brushed under the rug. When the housecleaner comes those germs and allergens that would otherwise be affecting this economy will need to be dealt with, but the housecleaner isn't exactly at our front door.
Arguably, the call has been made, the cleaner is coming, but it will take more than a moderate decline to dislodge the sentiment on the street today. The market indeed is set up for a moderate decline in the near term, but based on what we have seen from the Nasdaq and the Russell 2000 in recent days those investors looking for high beta place are still aggressive and active on the heels of market declines.
The S&P 500 and Dow Jones Industrial Average paint a completely different picture, and the difference between these two sets of markets is the definition of fast money. Fast money likes the Nasdaq and the Russell 2000, but fast money cells just as fast as they buy so anyone betting on follow-through needs to watch the S&P 500 specifically. Those December 31 levels will make all of the difference.
Currently, based on price alone, the markets are set up for a moderate pullback because thus far the S&P is holding. Anything more than that would require the dust from under the rug to come out.
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