Selling the Rally

Jim Cramer was like a kid with a pound of candy. Hurrah! Mr. President said something about stock market! Something which even sounds sensible! So what? Barack Obama actually said that stocks are at low valuations and it might be a good time to buy. Sure, trailing P/E is very low right now. The problem is, the E in that formula is going down hard. P/E might be low now, but after next round of quarterly reports it will be much higher. It's called multiple compression, explained in detail in the book of one James J. Cramer "Real Money: Sane Investment in an Insane World".

I have deep respect for our President. He is one of the greatest politicians I know. And he inherited this mess, and his administration has to improvise, without any blueprint, because we are in Great Depression 2.0 (I hope Larry Summers already explained that to Obama). The last one happened 80 years ago and the current economy is completely different from what was then. But so far, anything the President says about the economy causes the market to sell. And sell hard. He might pretend that stock market is not important, that Wall Street is the last of his worries, that Main Street shouldn't worry about stock market. Wrong! Main Street has majority of retirement money in stock or bond markets and both are on Wall Street. The economy is too much interconnected.

I was wrong about the bear market rally. I expected it on Tuesday, it happened yesterday. Well, right or wrong, in this market discipline requires selling into the rally. And sell I did. I sold my Research in Motion (RIMM) position, I think that 10% in two days qualifies for oversized gain. I also sold half of my Australian and New Zealand Banking Group (ANZBY.PK). Banks aren't worth anything anymore, anywhere in the world, they are to be sold. There will be time to pick up remaining pieces of banking system. Maybe next year. Maybe in 2011. But not now.

I still think that RIMM is a terrific company, but discipline trumps conviction. I think I can buy it back somewhere in 30s. Opportunities are made up easier than losses.

I'm still not sure about direction of this market. I want to believe that we had local bottom on Tuesday and the technicals are telling me that. But the tiny voice in the back of my head is telling me that maybe this rally happened (and didn't fade) because the President didn't say a word publicly about economy yesterday. In other words, this market is traded as much on government action as on technicals, and I'm not privy to what will be said tomorrow.


Full disclosure: At the time of publication author had a long position in ANZBY.PK and no positions in RIMM. Positions can change any time.

Comments

[theGhoad:]

After five straight losing days, one day up ain't a rally. If we come off those lows in pre-market to finnish above 7000 on the Dow, now we have a rally perhaps starting.

Mar 05 09:13 AM

[HaavBline:]

What rally?

Mar 05 11:46 AM

[Mad Hedge F...:]

I think this is an excellent idea. We’re going to 6,000 in the Dow, then maybe 4,000. So argues Louise Yamada, one of the most respected long term technical analysts on Wall Street. The targets for the S&P 500 are 600 and 400. Let me reprint a comment I made on January 27, when the Dow was at 8,250, some 1,500 points, or 22% higher. “There is a hulking great 800 pound gorilla sitting on the floor of the New York Stock Exchange right now. Past stock market crashes in the thirties and the seventies produced market price earnings multiples of seven. Today it is 11. Does this mean that the Dow has one last 40% down leg left in it before we bottom out? That would take us to a 5,500 Dow, or a 570 S&P 500. Maybe the old PE benchmarks have been rendered meaningless by zero interest rates. Maybe so many single digit stock prices and trough earnings are skewing the numbers. Or, maybe nothing makes any difference anymore, and everything is just driven by the sentiments of attention deprived traders on steroids. But if I am right, look for a few more weeks of Obamaphoria supported stock prices, followed by a long, frightening plunge in the down elevator.” Looks like investors found the gorilla.

Mar 05 12:39 PM

[Fred Voetsch:]

"Sure, trailing P/E is very low right now."

I love the way he calls it "trailing P/E", as if there is any other kind. Forward earnings are now no longer used by masters-of-The-Univers... like this because they no longer lead them to the conclusion they want.

HEY ALEX, READ THIS:
www2.standardandpoors....

It is by Standard & Poors themselves and it says that P/E ratios are not cheap. But he won't read it and if he does he will not pay attention and he will continue to lose money by betting on what he has learned from the past decade or two. At the very least I can hope that a few others' will read it and will see that we are far from out-of-the-woods.

Mar 06 02:00 PM