In Q3 of 1997 the US stock market blew the last chance to stay sober.
The S&P 500 in the 900s was historically overvalued, but not beyond what a healthy correction can manage.
But the market chose up.
EPS of the S&P didn't show much appreciation since, and earnings quality has deteriorated, and two years later the leading stock market index is 50% higher.
Why?
Not because of low interest rates, economic forecasts yadda yadda, but because J6P is putting his money in the market. All his money.
How many day traders are in the market today compared with 2-3 years ago? How many margin accounts?
I believe we are witnessing the greatest stock market bubbles of all times. Bigger then Tokyo, bigger then the South Sea bubble. Bigger then 1929.
Last Monday on CNBC there was a caller that asked about CMGI (down around 20% at that time), and broke into tears in mid sentence, crying she is down hundreds of thousands of Dollars.
Last Monday was the shot across the bow. The market ignored it, of course. A miraculous recovery with IBM's report the official reason.
It's a real greek tragedy. The hero is ignoring all warning signals and marching towards his doom. The coir is shouting warnings but the hero doesn't listen. The chain of events is clear from the beginning as the hero cannot escape his fate, designated to him by the flaws in his character.
A billion + shares day on the NASDAQ is not a rarity. Since January we had a lot of those on UP days as well. I read it as distribution.
Is it true that a hundred internet related companies are preparing to IPO by the summer? Increased supply is rushing to meet the inflamed demand. Some of them will be too late.
When I argued over at the AOL thread against holding this stock at current prices, two main arguments were invoked in favor of staying long the stock:
1. It is undervalued compared to... (YHOO etc.)
2. Buy and hold / Buy the dip strategy was the best strategy till now.
Somehow the third reason (It's a great company) was left out this time.
All three are true, of course. AOL numbers are better then YHOO's, buy and hold strategy was extremely beneficial for AOL investors, and it IS a great company. None of these arguments will help this stock from decimating with the rest of the gang when it's game over.
All the above is also true for MSFT, CSCO and DELL.
And it is game over right now if two conditions are met:
1. No new high on the NASDAQ before the next down day.
2. A close below the 13 dma (currently 2523) on the next down move.
AMZN still looks strong with the breakout to new high, but CMGI, YHOO and AOL look weaker. Let's see if AOL can stay over its 13 dma and overcome 152 (the closing on the day it got a 1.2 million shares imbalance to sell) with all the big boys selling.
My suggested play is a kind of bear spread on NDX June puts :
Example: buy 2 June 1900 puts, sell 3 June 1700 puts, buy 1 June 1500 put. At Friday closing prices this position costs $4200 at most (and you would probably get better prices then the bid and offer).
On expiration you lose all the premium paid over 1900 , break even at 1879. Max profit at 1700 is $35800 (almost 10 bagger), it declines slowly to a profit of $15800 at 1500 and remains steady under 1500.
Caution is needed when entering this position with limits as the market may move against you and you will be filled only to one side, so I advise entering market ATO.
you may play with the strikes to find the most suitable for your targets, in the example I just used the round numbered strikes.
ATG |
