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Tuesday, October 02, 2012

Bifurcated Market

At Wolf on Wall Street, we've been paying careful attention to our proprietary accumulation/distribution (money flow) indicator 3C ever since QE-3 was announced on September 13th. As the market has drifted lower we've been watching for signs of smart money accumulating stocks at cheaper prices in anticipation of the flow of liquidity QE-3 will unleash.

While there's a lot to pay attention to and while I can't share all of our findings as Wolf on Wall Street is out member's site one of the very common themes we have seen over and over again is that of a "Bifurcated market", meaning instead of the normal either "Risk on" or "Risk off" in which most every stock moves in the same direction as the market, we have found this is more like a stock picker's market, but to the very extreme.

In a way it makes sense; conventional wisdom is that QE-3 will do what QE-1 and 2 did, send all stocks and asset classes higher, but some things are different this time.

When QE1 was introduced and QE2 first telegraphed at Jackson Hole, asset prices were near local lows, the dividend yield for the S&P-500 components was 4%, now its 2%, the SPX components average P/E was 10 and now it's 14.9. So assets are more expensive now then they were then as the market front ran QE3 in anticipation and marked prices up. 

There's also the inflation problem that QE brings and if you have been paying attention to manufacturing reports in the US and the world over, manufacturing is in decline and very sensitive to material costs that are rising, so QE3 may very well hurt manufacturers and the economy more via inflation or stagflation, this doesn't do anything for unemployment as manufacturers already have high inventories, have low capacity utilization and are laying off employees, there's where QE3 is at odds with unemployment, but QE has never been shown to reduce unemployment, in fact unemployment seems to have been political cover to launch QE as Bernie knew that the economy was going downhill. The recent last Q2 GDP revision was horrible and GDP has been cut in half over the last 3 quarters, that's what I think Bernie knew before everyone else and the real reason for QE-3.

As for market bifurcation, here's but one small sample, RIMM vs. AAPL.

 The long term trend in RIMM has been down with recent lateral trade, we'll look at this vs. AAPL.

 Here's more recent trade, RIMM coming from a downtrend to a lateral trend.

 This is RIMM intraday today up about 5%, but losing ground in to the close.

Now AAPL...
 AAPL's long term trend has been up, but recently more lateral, the opposite of RIMM.

 Here's a close look at the daily chart of AAPL, again, virtually the opposite of RIMM.

 Intraday today, AAPL fell most of the day to only rally during the last hour.

This is RIMM in red vs. AAPL in green today, note they are almost exactly opposite rather than moving together intraday as most stocks have in the past before QE3 was announced, even if relative performance was much different.

While we have opinions on both AAPL and RIMM, it all depends on the timeframe you are trading, the instruments you use (equities, options, etc.), the point is, these are two stocks both in tech and not too dissimilar, they are acting very different though. This is 1 example, there are tons of examples of this kind of behavior in almost every facet of analysis. QE-3 may surprise those who follow the conventional wisdom.

Brandt Uses Worden's TeleChart and StockFinder 5 Exclusively


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