A few weeks ago, we moved from an aggressive cash position (80+%) to about 50% long. We continue to find intriguing set ups and attractive trades, mostly in the small and mid-cap space.
But that doesn’t mean we are sanguine about the likelihood of this rally going on forever. Indeed, there are many factors that are making me uncomfortable with becoming even more aggressive.
Consider these 10 factors making me nervous:
1. Low volume: Friday’s quad-witch volume notwithstanding, volume has been extremely light for weeks now. Historically, light volume is associated with tops (disinterest) while heavy volume tends to accompany bottoms (capitulation).
2. Consensus on political outcome: If one more person announces coming gridlock is good for the market, I may have to scream. Conventional wisdom is usually unreliable about unknowns in the future. The widely held beliefs (assumptions, really) as to how this plays out is too pat, and creates an opportunity for surprise and disappointment.
3. Absence of Volatility: The VIX keeps sliding, as volatility fades. This may be reflecting complacency — never a net positive for stocks.
4. Housing overhang: One of several major macro economic factors weighing on the market. This is going to be an ongoing headwind, as we make our way down towards fair value.
5. Sentiment: Bullish sentiment (expectations that stock prices will rise over the next six months), rose 7% points to 50.9% in the latest AAII Sentiment Survey (historical average is 39%). Sentiment suddenly becomes bullish after each spasm higher sets off my contrary alarm bells.
6. Recession Porn “confusing“: The flip side of the bullish trader sentiment is the obsession with every negative datapoint. From Roubini to Zero Hedge, people seem to be hunting down anything foreboding. (How funny is this tweet: zerohedge once again pissed that asteroid avoided colliding with earth)
7. Overhead resistance:Market are coming up against levels where lots of supply lives. In the past, this is where resistance lay. Watch SPX 1150, NDX 2370, and Dow 10,800.
8. Job creation soft: The 2nd economic headwind. Until this improves, there can be little better than modest improvement in retail, home sales, and deleveraging.
9. Lack of market leadership: Quick, what are the market leaders in this cycle? Its hard to really say — Banks, Energy, Technology? Not really. How about Ag, Consumer Staples, Utilities? Its tough to see much in the way of leadership.
10. Consensus that gridlock is good: I am becoming increasingly wary of the consensus belief that gridlock is such a wonderful thing.
None of these individual items are fatal to the market rally — but collectively, hey are the factors making me nervous . . .
Great post, Barry. Now what are the ten things giving you confidence, if any?
>> Now what are the ten things giving you confidence, if any?
1 – 10: Free money from the Fed.
Add 10 more. 1. Continuing Eurozone debt problems. 2. Fast change in the yuan/$ rate. 3. China construction bubble. 4. Weak dollar. 5. U.S. debt. 6. Out of control Fed printing press. 7. Possible bankruptcy of U.S. States, e.g., California. 8. Upcoming U.S. elections. 9. October historical down trend. 10. High energy costs and BP.
Oh, on the VIX. Keynes’ statement on the markets also applies to the VIX, “it can remain irrational longer than you can remain solvent.” The VIX can keep going down (think early 2006) until its completely irrational in the single digits. Just like the VIX at 40 in 2008 turned out to be not so high after all. I’m starting to think the VIX is not a useful indicator at all and that “tail risk” is no longer a black swan but an annual event.
I agree on the “recession porn”. I collect “pop finance” books from other decades and its amazing how the “recession porn” reminds me of statements made in investing books from the late 70s.
Here’s Howard Ruff in 1979, for instance:
“Much of the American wealth is an illusion which is being secretly gnawed away and much of it will be completely wiped out in the near future. . So what is the rest of your future? A grisly list of unpleasant events – exploding inflation, price controls, erosion of your savings (eventually to nothing) , a collapse of private as well as government pension programs, and eventually an international monetary holocaust which will sweep all paper currencies down the drain and turn the world upside down.”
Btw, I’ve done various studies on volume and wrote about it in my first book, “Trade LIke a Hedge Fund”. I don’t think its historically/statistically been true that low volume is associated with tops. It certainly wasn’t true in 2000 and 2007.
and 11. Many run for gold 12. Meny run for bonds 13 The old formula was wrong, where is a new formula?
You must be logged in to post a comment.
"The best things in life are free, but sooner or later the government will find a way to tax them." "”Anonymous
The Sept NAHB home builder sentiment index was unchanged at 13 holding at the lowest since March '09 but was 1 pt below expectations. Both Present Conditions and Future Expectations held at the Aug levels but Prospective Buyers Traffic fell 1 pt to 9, the lowest since March '09. NAHB chairman said "builders haven't seen any reason for improved optimism in market conditions over the past month...if anything, consumer uncertainty has increased, and builders feel their hands are tied until potential home buyers feel more secure about the job market and economy." Also an issue for builders is "the large...
Read Full Article »