Whenever we are nearly fully invested (like we are now), my cognitive biases become acutely aware of all the things that could go wrong. (When we are short or in cash, the focus is what could go right)
It is the opposite of confirmation bias I write about so often.
What is it that makes me concerned about our investment posture over the short term — say, the next 30-90 days?
"¢ Hot money seems to be rotating from speculation to speculation, rather than inflows accumulating longer term holdings;
"¢ Traditional measures of Stocks (P/E, return on capital) suggest stocks are no longer cheap; Longer term measures of valuation — Q ratio, Shiller’s 10 year P/E — show stocks are actually pricey;
"¢ China is on the verge of rolling over, falling nearly 8% in a single session; That wiped out 3 months of gains;
"¢ Defensive sectors — especially health care, but also staples, telecom and utilities — have found a bid. Often telegraphing a reduction of buying by fund managers;
"¢ Way too much cap weight is tied up in a handful of stocks. Apple (AAPL) is responsible for far too much of the Nasdaq gains than is healthy.
"¢ The rally that began March 2009 — now well over 2 years old – may have gotten ahead of itself;
"¢ The rampant speculation in Silver and its collapse is a reminder that money that piles into a sector very quickly heads out the door ever faster;
"¢ Assumptions about earnings seem to project double digit gains forever;
"¢ The end of QE2 removes a significant bid under equities and bonds. It also will allow the dollar to rally, potentially punishing commodity traders;
"¢ While earnings have been good, future guidance from companies is starting to moderate. This does not bode well for earnings supporting SPX 1400-1500 future levels;
"¢ Speaking very generally, the low volume Markets just feel tired here.
What is keeping us long?
None of the usual technical or internal signs of a major correction are present (yet). Supply continues to be constrained, selling pressure is light to moderate, breadth and liquidity are strong.
Giving the markets the benefit of the doubt has been the winning play so far. We expect this to continue to work until it doesn’t.
Hopefully, I will be able to warn you in advance before markets get too far gone.
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
BR,
‘complacency’ seems to be the Currency du Jour..
with that, Options premia, on average, tend to be, quite, Low..
for this Axiom: “We expect this to continue to work until it doesn't…”
would it not be Prudent to be Long “downside protection” (e.g. Puts) ?
http://www.thefreedictionary.com/axiom #3 http://www.thefreedictionary.com/e.g. http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Options+Puts+as+Insurance http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Options+Puts+vs.+Stop+Losses
[...] Barry: Causes for concern in the current market. (TBP) [...]
Although I still believe there is upside to this rally, there are many things to be concerned about wrt the sustainability of this market rally.
I agree with many of the points in the post, but I also believe there are many other factors to be concerned about. The excessively positive sentiment, as displayed by many measures, as well as the “parabolic” trajectory (especially since September) of many stocks, including the entire S&P500 itself, is highly worrisome.
I am of the opinion, admittedly held by very few, that the entire stock market is in a “bubble.” Here is my post on the subject, for those interested:
http://economicgreenfield.blogspot.com/2011/03/stock-market-bubble-various-aspects.html
“Hopefully, I will be able to warn you in advance before markets get too far gone.”
I hang on your every word. Seriously.
Appreciate you giving us the ‘heads up’ when you see turns coming , up or down.
It sure must suck to own silver. Especially if you just bought some recently.
Don’t worry. I’m sure it’s coming back real soon. Silver is the real deal. If it cost $million billion, it would still be undervalued and worth a refi on your house just to get in. Haw Haw Haw.
Note to silver owners: Now that it’s Spring, have you seen how wonderful the tulips look this year?
I agree with all those points too. I trade the Aussie market and have been short for weeks – there’s some other factors at play there (opposite effect via currency etc…….)
One thing that doesn’t seem to get much attention is that the equal weighted Sp500 and the Russell 2000 etc……..are at (or recently hit) all time highs. Knowing where we are in the real economy that is just gobsmacking , even allowing for the multinationals and the weak dollar.
Having said all that , most traders have learned the hard way in recent years that this is no longer a “market” and Uncle Ben or some government somewhere usually manufactures some support before things really collapse. This makes me very wary when short.
All I can say with some certainty is that if government intervention does wane then I expect the market to follow. I find it hard to quantify the effect of QE2 ending as , even if nothing else happens, QE3 is already in place via the recycling of maturing debt
I’ll play my guard position .. take with whatever
1st that Apple stock – the mp3 .$ download wars – “theres no way outta here when you come in your in for good” – what would the stock price be if events were allowing the company to go private (with that cash stash) – where would you be buying to own a seat in the board room – with these rules do you really ever own that seat in anarchic events – and if the fans where left out via no kickbacks where will the company value be .. funny business your in BR
2nd “What is keeping us long” .. um the dream it’ll all work out for me soon (us/we) .. no worries over this & that .. “never give in” because pulling the plug is pulling the plug .. just “go shopping” ” it’ll all work out”
BR.. Love the Blog Been Reading for the past few years. But Honestly, the only reason you are long is because the Federal Reserve IYHO is not going to let the stock market go down, until it does. The bailouts were about protecting the elites. QE1 and QE2 were the same, and guess what Qe3 – QE567 will be the same.
I know I’m exhibiting bias myself, but the list of cognitive bias just seems so overwhelming. Would you still be human if there were indeed some way of being simultaneously aware of and able to analyse all these biases in real-time?
http://en.wikipedia.org/wiki/List_of_cognitive_biases
Last note to silver owners: You still have a few months to make some serious scratch in equities. Money has to flow somewhere and the flight to safety trade is nowhere near ready yet. If you think gold will hit $1650 soon, then you might go there for a quick 10%. To me, gold is the stomping ground for the other set of greater fools. Equities or cash is all you have if you have a minimum amount of common sense and a schmere of trading skill. Even if equities eventually crash, it will take days to weeks and be obvious.
Then again, I may be full of crap and silver will reach a $million billion next month.
Looks like Soros dumped silver to the new found “bulls”
http://www.fundmymutualfund.com/2011/05/are-george-soros-and-other-prominent.html
The greatest concern is that nothing has been done "” other than to throw even greater quantities of bad money after bad money "” to correct the glaring flaws in the system that led to our current situation.
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