Slope Of Hope with Tim Knight

Survivorship Bias (by Consistently Incredulous)

I tripped across a Standard & Poors announcement last week that CBOE Holdings (CBOE) will replace Temple-Inland (formerly TIN) in the S&P MidCap 400 index as International Paper (IP) (S&P 500) completed its acquisition of Temple-Inland on February 13th.  This reminded me of a good Seeking Alpha post I read last year about Survivorship Bias in Index Performance.

I highly recommend the full post; but in a nutshell, survivorship bias in the indices:

“Specifically, in the process of rebalancing (selecting and or deselecting stocks) the indices it is the tendency for failed companies to be excluded from indices because they 1. No longer exist, 2. Their market capitalization has fallen or 3. Their industry is in decline (which likely caused the first two reasons); this is considered Type 1, survivor bias. Inherent in this type of bias is the error you make in just counting the survivors.”

Apple at $1000/share? Oh, at LEAST!

Most of you have probably already seen the bullgasm happening over at Barron's. Here's their cover for the week:

Pushmi-Pullyu

Well, the market presents a mixed bag - - some major indexes look bullish (which explains why I finally relented by actually BUYING some stocks, which is probably a huge short signal in itself) and others look bearish. Let's take a look at them, in bullish/bearish order:

The NASDAQ Composite pushed above its long-term resistance line late last week, and it's been inching higher ever since. This chart is bullish, period.

The Dow Jones Industrial Average (the Dow 30) likewise beat its "bin Laden high" from last May 2nd.

The Apple-powered NASDAQ 100 has been on a huge tear since Thanksgiving, and, as with the broader Composite, is straight-up bullish.

The strongest argument for the bearish case (which could be badly damaged by a single "good" headline at any moment) is the EUR/USD.

It turn, the $HUI Gold Bugs Index is poised for a beautiful fall (provided it stays under that centerline).

The Russell 2000 is right up against resistance, and this is a point where it could easily slip back to the high 700s.

The Broker/Dealer Index, $XBD, may have double-topped.

Lastly, the NYSE Summation is a screaming sell right now. Look how it's configured compared to Spring 2010, shown on the left, just before its big tumble.

So your guess is as good as mine at this point. At this moment, I'm 50% in cash, and of the 50% in equity positions, 25% is long and 75% is short. It's pretty much all about the Euro at this point, folks. We are all FOREX traders.

Back to the Hybrid Model

Well, this morning was the final straw for me. Everything was looking ship-shape for a nice tumble today, and then ol' Ben came out and said whatever he needed to say to crash the dollar and goose equities again. The GDX, shown below on a minute bar chart, nicely expresses how a very clean breakdown was turned around 180 degrees.

I have gone long sixteen carefully-chosen equities. I am still keeping a big chunk of my portfolio in cash (a little over 50% right now), and I've got a 30/70 split between long/short. So, effectively, I'm only 20% short the market.

In any case, I cannot depend on the market going down in order to turn any sort of profit, so I've got a hybrid portfolio again. The cleanness of the NASDAQ breakout is simply too evident in order to not have a single long position.

Mass Media Mantra: "Stocks are Cheap!"

In this lifetime, 99.5% of the people talking about equities have a vested interest in assets being bid higher. Being bullish is just what everyone does. It's the realm of normal. The bastion of the masses.

Usually it works. But just keep in mind that all the articles you are seeing about how cheap stocks are is hardly an - - umm - - objective viewpoint.

Just try to find the mass media warning you about how overpriced stocks were in early 2000 or mid-2007. That's a dry hole. And, to that point, I offer the value-priced CRM:

Thresholds

Well, the bearish case seems to be getting weaker by the day. The blowout earnings report by Apple (which, let's face it, isn't much of a shock) is almost certainly going to mega-goose the market tomorrow, and only God knows what Bernanke is going to say or do to propel things further. I am seeing more and more of this kind of story hitting home pages:

I have remained mostly in cash this month, and I'm currently long DRN and JNK as hedges. Everything else is little short positions.

I offer the charts below without further commentary. They simply illustrate what I consider thresholds of various indexes which, if crossed, each represent another nail in the bears' coffin. Maybe they'll be reached; maybe they won't. In any event, they merit observation.

Bear Sentiment at 6 Year Low (by Springheel Jack)

I'm going to be posting a lot of bullish charts today, so I'll balance that by leading with a bearish big picture chart. That chart is of the NYA Composite, which is a very broad based index including all stocks listed on NYSE, with the exception of some ETFs etc. On this chart you can see the huge H&S building that I have posted before, and it's also worth noting that NYA has not yet reached the October high, which is very strong resistance as it was also the H&S neckline for the topping H&S last year. A lot of analysts are changing to a bias that a new bull market is in progress but I'm not one of them yet, though I am most definitely weighing the evidence that it might be:

Unmitigated Victory for the Bulls

In spite of all the reasons - - analogs, statistics, stochastics - - that were emailed to me about why the market would absolutely, positively, no-doubt-about-it fall this week.........it isn't happening. Indeed, the bulls have pretty much owned every single one of the eleven trading days so far this year.

The bearish case is getting weaker by the day, and the bulls were able to create breakouts across the board today.....

+ without any announcement from the Fed
+ without any big news from Europe
+ without any "stimulus" goose of any kind.

Just plain, old-fashioned, earnings-driven buying.

The Threatening Breakout

Well, after all the good reasons why the market would be down this week, it just isn't happening. 2012 appears to be the year when everything goes up a little, day after day.

The Russell 2000 has been threatening to break out. The level at 773 appears to have tremendous sway over this index, having represented firm support for a long time and, most recently, resistence. A clean break above this level might open the floodgates. Be wary.

Revisiting My MLK Post

I am happy to join with you today in what will go down in history as the greatest demonstration for freedom in the history of Slope.

Five years ago, a great American, in whose symbolic shadow we stand today, began shorting the market. This momentous decree came as a great beacon light of hope to millions of bears who had been seared in the flames of withering injustice. It came as a joyous daybreak to end the long night of their captivity.