Thursday, August 06, 2009

Do As I Do, Not As I Say

OK, so I've been wrong. Since march. For 50%. I guess the the old saying about following the bear into the correction and not out still holds. Massive stimulus, a big inventory restocking and housing inventory clearing all coming in the next couple months. These positive catalysts may well be priced into the market at this point or maybe not. These catalysts were some of the reasons I had expected a big bear rally last fall. I became impatient and then cataclysmic and then lost the plot as a trader. Shit.

I have been lucky enough to play on the edges and I can't be too hard on myself for not catching the bottom. I'm up as much as Paul "Trader" Jones, so it's not a disaster,and I didn't even drink my morning beer. What signs did I miss? Mostly a deeply oversold market trading at 1995 levels on an economy that had "gone fishing" for three months. As governments restored liquidity and functionality to the financial markets and gave blanket guarantees, trade resumed and the fear of a complete failure of the financial markets faded. The bounce was all but inevitable. And as always it is toughest to pivot from looking for the worst to looking for the best.

I did get some things right - buying corporate bonds and Asian equities. But in US stocks I have been blinded by fear. The liquidity/insolvency risk is different from balance sheet recession/insolvency risk. The former happens quickly, and scares you to death - and gold and ammo. The later takes time and may be a bit like boiling the frog: it happens slow enough that the fear fades. As we transition from one to the other, I believe the market will respond accordingly. The weight of poor consumer income, a growing need to save, the lack of job creation on recovery is too much; the US consumer is still the tail wagging the dog of the world economy. The poor quality of our recovery and the effect of delevering to the economy is well documented.

In the meantime, I cant fight the trend - Dow Theory, Coppick, Wall of Worry - call it what you want but this market is fully engaged with what could happen in the next few months instead of what is happening now. Still too many mangers underexposed and underperforming, trying to leg their way in. I thought the banks would be sold off after the Q2 reports, but the market seems to believe that the banks will be given all the time needed to earn their way out of their balance sheet problems. BAC, C and KEY are all moving pretty massively, and there is little news likely to come out near term that would scare investors away.

So I am long now. I have been trading long since April with no conviction and have missed some massive moves, particularly in the commodity names (TCK and FCX make me cry). I own BAC/BSX/SSO/CLF/DBA/FXI. I have been long these names since Dow 8800. I have stops on them all and I raise the stops daily. I still have no conviction and am simply following a very strong trend. I am now staying up every night until 3am to manage these positions. I am trying to make hay while the sun shines.

The next 2-3 weeks will be key in my mind; light volumes, traders headed for the Hamptons and a huge rally already. Any news like the FNM note last night should be a real test. A crack down on bank lending in China will also be a test. If we come out of this period holding support on the various indexes, then maybe the good news that is still ahead - the inventory stocking, housing sales volumes, gov spending - will take us parabolic. And I guess when that news starts showing up, I'm going to bail. And sleep.


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