Wednesday, January 11, 2012

Today's Market

Looking over the names that were up today, the rally this week has focused exclusively on high beta and high short interest names - similar to the monstrous October rally. Neither big cap growth nor any type of value is doing well; again, similar to the October rally. Remember that at the end of October when optimism had prevailed, the market then proceeded to drop 5% in two days.

Earlier this week, Prechter called for maximum short exposure. He is not infallible, but he is worlds better than whoever (or whatever) was buying solar stocks today, and I would weight his advice about 20 percent in a decision function.

The latest AAII survey will be out soon and should be instructive. I would imagine that retail is embracing the rally and is even more bullish than last week. That would be another high quality decision input.

I feel inundated by commentary of people who are looking at lagging indicators, like growth in consumer credit. This is a data series that peaked in summer 2008, close to nine months after that recession began. Read Hussman's column about this data interpretation problem. Similarly, in past recessions neither the level of job growth nor its short-term trend had any predictive power regarding the subsequent direction of the economy.

Reflecting further on the mania or upward panic today: it may be explained by managers who were down in 2011 and cannot stomach any further losses. That would explain why they are so skittish. It would cause short squeezes in the dogs and dumps of value stocks, just as we saw today. I do not think it probable that managers who have lost heart will be able to make money.

8 And the officers shall speak further unto the people, and they shall say, What man is there that is fearful and fainthearted? let him go and return unto his house, lest his brethren's heart faint as well as his heart.
A trading process that attempts to avoid any drawdowns by violently and immediately covering shorts and selling longs at the first sign of difficulty is unlikely to work. If it was possible to invest without drawdowns, then no one would need any capital to invest; you could leverage infinitely on margin. Whoever trades according to that process is going to systematically buy high and sell low.

1 comment:

eahilf said...

Neither big cap growth nor any type of value is doing well;...

I noticed this as well. Crap is king again. Hard to know what to make of it...or what will happen next.