BEVERLY HIGHLAND CAPITAL MANAGEMENT:
May 20, 2012
Facebook Flopped – why that’s a good thing.
After months (arguably years) of hype and spin Facebook became a publically traded company this past Friday – and the market yawned.
Facebook, now stock ticker-symbol FB, issued shares of stock at an IPO (initial public offering) price of $38 per share. “Experts” and lay people alike, predicted that FB could easily see gains of 40%, 50% or even 100% during it’s first day of trading but they were wrong. Instead of making great gains in FB’s first day of trading, it went nowhere, closing at essentially the same price where it went public.
While this is unwelcome news to those holding shares of FB, it can be considered good news for everyone else because Facebook’s first day flop is a clear sign that the market acted rationally and did not fall for the hype surrounding the stock. The market’s rejection of FB is also an indication of investors’ generally negative outlook for the stock market and might be a great contrary indicator.
You may recall that when individual investors are overwhelmingly positive (bullish) the markets tend to do poorly but when individual investors are generally negative (bearish) the markets tend to rally. This phenomenon repeats itself over and over as the majority of investors are consistently 180 degrees wrong with their timing.
The markets are currently stretched tight like a giant rubber band. Either they will snap back and produce a jarring rally (95%+ probability, we think) or they will crash similar to 1987 (less than 5% likelihood).
In addition to this new negative FB indicator, virtually every significant market-timing indicator is pointing to the same conclusion. Namely, that we are poised for a big market rally to start any day – like… as soon as tomorrow. That is not to say we could not have one big, scary, fear inducing, “the sky is falling” drop before we get a huge rebound – but we believe the bottom is very near.
Take a look at our checklist:
þ Markets are technically extremely oversold
þ Put/Call ratio extremely bearish
þ American Association of Individual Investors (AAII): 23.6% bullish vs. 46% bearish
þ Advance/Decline ratio reaching extreme levels
þ VIX (volatility index) overbought
þ SPY and QQQ are more than 2 standard deviations below their 20 day moving averages
þ The market is cheap from a fundamental standpoint
☐ Greece started to magically act adult-like and stopped spending money they don’t have… crickets…
All in all, not a bad showing when every box gets checked except the one where Greece has a fairy-dust inspired epiphany.
We don’t expect everyone (anyone?) to be interested in the details of this list of market leading indicators (the actual list is much longer) but I send it along as an indication of how tightly the rubber band is stretched when every significant indicator has been triggered.
Now before we break out the “To Infinity and Beyond” rally Champagne, keep in mind that the big rally we expect to start any day now is expected to eventually fail and the market should retest the current low levels before it can maintain new higher highs. But just because we should eventually revisit the current low price levels does not mean we should not enjoy and profit from the anticipated blast off.
As one of my favorite traders is fond of saying, put on your space helmet and prepare for blast off!
Enjoy the remainder of your weekend.
Dale
This material contains the opinions of the author but not necessarily those of Beverly Highland Capital LLC and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
