We Churn Around In An Overbought Market

Equities start the day higher as we churn around in an overbought market. Here’s a question for you…are we at the top? Is this it for the market? I’ll admit that’s a loaded question, impossible to answer, and probably useless to discuss but let’s try anyway. I said on Tuesday that wonky price action in momentum stocks was a “sign of the top” so where exactly did I get that from? Do me a favor, click this link and bookmark it. Did you do it? Come on, your pal Mike is asking for a favor here, don’t let me down. That article (written by David Merkel) is one of my favorites ever and I read it every month to remind myself of what a top might look like. So have any of the things the author talks about shown up in our market? I’d argue yes, a few have. His base case is that a market at the top becomes very momentum driven (makes sense). Momentum investors stop caring about valuation and “buy what goes up and sell what goes down”. Is that happening? Maybe. Most of the big market leaders this year are high PE names like $TSLA/$YELP/$LNKD/$AMZN/$NFLX, and boy do they whip around. Another characteristic is “the quality of IPOs decline” (i.e. companies go public with no sustainable competitive advantage). Have we seen that? Tough to say, but you could make an argument that we’ve seen a few. How about $SFXE (Baird does not cover and was not in the IPO). It’s a concert promoter that IPO’d to a $1B mkt cap. So why is that a big deal? Well they did $24mm in revs last year so that’s quite a lofty multiple. Maybe dance music is the next big thing but do they have a sustainable competitive advantage? I guess that’s up to the market to decide. Anyway, I could talk about this all day but unfortunately we need to move on. I’ll be referring back to that link frequently so please do give it a read.

After the open we entered a relatively quiet sideways market. I say quiet market but today was actually the busiest reporting day of the season so we had quite the conundrum on our hands. Overall price action was muted but there were a few single name movers. Tech seems to be having a rough go this quarter and today was no different. Big losses in SYMC, AKAM, XRX, TQNT, and FIO as guidance is squishier than my waist. A few decent winners in NOW, PCP, NBL, PHM, and ALXN so all was not lost. You know what another sign of a top is? Value investors leave the market. Klarman is one of the all-time great value guys so that one hurts a bit. Economic data was a bit soft today, Weekly Claims missed and Flash PMI came up just short but earnings seemed to overshadow that. What’s the point of a white crayon? Does anyone have thoughts on this pressing issue? The only thing it shows up well on is black paper and I can’t say I’ve ever seen anyone draw on black paper. Near useless if you ask me. Anyway, quiet’ish morning dominated by a couple earnings zoomers and by lunch we sat on 1,752, up 30bps, waiting for something meaningful to happen.

Which kind of did, at least for our purposes here. Famed research shop Muddy Waters decided to drop a Daisy Cutter on $NQ calling it a “zero.” What was the stock’s reaction? Take a look here to find out (as an aside: 5 buys, no holds, no sells on the name. Baird doesn’t cover). Chinese ADRs…fun times. We closed exactly where we were at lunch, 1,752, on a day where we digested gains. So am I calling “top” here? No, not at all. I think this market has room to run. What I’m trying to do is start a conversation with myself about what a “top” might look like. Remember, tops are a process, not an event. So we’ll keep looking for things that make us go “hmm”, and IPOs that make us go “wait”, and stock moves that make us go “ugh”, because the signs will be subtle and we need to be paying attention.

Final Score: Dow +62bps, S&P500 +33bps, Nasdaq +49bps, Rus2k +71bps.

News Highlights:

We’ll end tonight with a little Halloween competiton. Time to pick the best 2013 Halloween costume.

Entry 1 is the front runner, I think it’s awesome with high marks for creativity.

Entry 2 is a dark horse. Amazing makeup.

Entry 3 is a video, and brings the funny.

Which one wins my dear friends?

Have a good night.