I'm Not Short Simply Because This Bull Market Won't Die Easily
"Welcome to the party, pal."
--John McLane, "Die Hard"
For the first time in a long while, I am not short any indices and I own no leveraged inverse market ETFs.
It is not because I am bullish. I am not, as I continue to believe, looking over the balance of 2017, that the downside risk is roughly 2.5x to 3.0x the upside reward.
Indeed, the market recently has displayed obvious technical and fundamental flaws that have led to some serious markdowns of certain sectors (e.g., financials) and individual equities (e.g., IBM (IBM) overnight); we have taken advantage of some of these. Moreover, most valuation metrics are extremely stretched against a backdrop of numerous and unknown economic, profit, political and geopolitical outcomes, many of which could be adverse.
As I have noted, it is increasingly difficult to navigate a market dominated by the overly popular ETFs and quant (volatility-trending and risk-parity) strategies that worship at the altar of price momentum. It is also because the "buy the dip" mentality remains indelibly etched on the forehead of most investors and traders that the Pavlovian reaction won't die easily.
While it has paid in financial shorts (covered!) and elsewhere to be anticipatory on the short side over the last few months, going forward I prefer to revert to a reactionary position for the reasons mentioned in today's opening missive.
The markets are likely to be whippy in the near term and, with a little help from Trump policy (expectations have become more realistic and have been pushed back) and modestly improving hard data, the markets may be bought by some after the recent weakness. A market stabilization/recovery also could occur if my conclusion is correct that we are seeing a buying climax in bonds (see my next column).
That said, if the market does rally hard, I will be back to re-establishing my short book. In the meantime I plan to trade opportunistically from both the long and short sides and from a market-neutral and underexposed position.
As discussed in Feeling the Market's Pain (below), I start the day in a market-neutral position:
I continue to believe that the complexion of the market is changing - for the worse. While the technicals, as Rev Shark relates, are ugly, the machines, algos and ETFs run the asylum. But that doesn't mean that stocks will move straight down.
Indeed, if I am correct that bonds are witnessing a buying climax and a slow but steady rate rise may follow -- stocks (even of a financial-kind) may be able to stabilize over the near term.
Regardless of my view, it's probably a good time to try to stay out of trouble with larger-than-average cash positions.
My guess is that the market without memory from day to day -- see Mel Brooks and The Markets (Part Trois) -- will frustrate both bulls and bears with its inconsistencies in the days ahead.
I plan to remain flexible and opportunistic. I am still very bearish, however, over the balance of the year.
I also plan to short some anticipated strength, when appropriate.
"I don't know.
I really like that
You know what I am going to do?
I am going to leave your words on this blackboard for all my classes to enjoy
Giving you full credit of course Mr. Spicoli."
--Mr Hand, "Fast Times at Ridgemont High"
I am short-term neutral and intermediate-term bearish.
The above is a blueprint of my strategy and my attempt to game an inconsistent market with no memory from day to day, and one dominated by investor products governed by machines and algos that rely on price-momentum strategies that are agnostic to balance sheets, income statements and private-market value.
If it sounds like I am confused and uncertain, I am -- and that is manifested in my market-neutral exposure today.
The 8-year-old Bull Market may not die easily.
Over the next month or two I plan to remain flexible and opportunistic, reacting to the market action with a keen eye on the fundamentals and on valuations.
But, like another machine -- the cyborg assassin called The Terminator -- "I'll be back" to the dark side.