-Henry David Thoreau
Shorting pullbacks in a market that continues to make higher highs and higher lows is not a strategy that I subscribe to. Selling high and buying low, however, as revolutionary as that might sound, is…
The prejudices that have been born out of levered long investors being pulverized in the last 18 months are a real fear factor in global equity markets. This is the behavioral side of finance that even the “smartest” of the “smart” crowd on Wall Street cannot avoid. However, “it's never too late to give up our prejudices.”
As one of our sharper Boston-based clients likes to say, “overbought” is as overbought does. Did I make sales when I thought we were overbought? For sure. That’s what I do. But what is it that you do?
Do your prejudices align your style with buying high in an effort to, as CNBC’s Fast Money used to say, “Sell Higha!”? Or are those your bosses’ prejudices? Or are they neither, and simply something that’s mandated by a rigid investment strategy that was well served for a market that went straight up for the 25 years prior to 2007 in the face of interest rates going straight down?
With this backdrop of stylistic investing stagnation, The New Reality is that there are plenty of investors in 2009 who are capitalizing on consensus and absolutely crushing it. As my Partner, “Big Alberta”, Daryl Jones likes to say, “now is the time to crush, or be crushed.”
In my career I don’t think I have ever heard such a binary line of feedback from the investors in our exclusive network. People are glowingly happy about their YTD performance, or outright depressed.
The Great Depression has indeed found its way into the marketplace in 2009, but that is very much a unique emotional prejudice that has been the direct output of people pressing the consensus bear short case that we had been making from late 2007 until late 2008. I certainly don’t consider myself genius for having understood why this market would turn – for anyone who was allowed to be objective (both on the way down, and now on the way up), the facts changing have been crystal clear.
So what about that pullback that everyone seems to be waiting on? Don’t you find it a tad ironic that everyone is waiting for the same catalyst? Yesterday morning’s Institutional Investor sentiment survey had Bears climb right back up the consensus tree to 34% versus 31.5% last week, and only 41% of investors in the survey will actually admit they are bullish. The numbers don’t lie; people getting short squeezed do.
The SP500 has provided plenty a pullback over the course of the last 4 trading days. After all, it has been down 3 out of the last 4 days! Within the construct of all my global macro factors pointing to positive price momentum across both immediate and intermediate term durations, what else do I want to see here? A calamity like October/November of 2008? Sure, in hindsight, don’t we all. Those days are long gone guys – let’s get with the program here.
In Monday’s Early Look, I outlined having sold the number of long positions in our virtual portfolio down to 17 (meaning I sold into Friday’s closing strength of the SP500 at 929). By the time we saw Tuesday’s intraday low of 896 on the SP500, we were all starting an expedited -3.5% 48 hour correction. Was that the “pullback” everyone wanted to see, or every time this market pulls back is everyone in the room scared of their own shadows of prejudice? You tell me…
No matter where you go in this 2009 game, people generally are doubtful of the rally. This consensus prejudice continues to provide tremendous opportunity, particularly for those investors who are crushing it year-to-date, and ALLOWED to take the shots when they should be taken. I’m not so enamored with what it is that the “smart” people in this market do anymore – been there, done that. I am going to continue to do the only thing that makes sense to me, and that’s keep doing what it is that I do.
Tuesday, with the pullback in hand, I was covering/buying all day. I took my number of long positions back up to 28, and cut my short positions back down to 7 (see our portal for all virtual positions, with time stamps and returns versus entry points, at www.researchedgellc.com). Intraday, I was asked by more than a few people if I really had “conviction” in doing so – conviction is as conviction does…
My immediate term downside support range for the SP500 is 894-903 and my upside resistance line is 938. The plan is that, as prices change, so will my plan. So, for now, I’m taking the shot that my investment process is allowing me to take. In the meantime, may the Shadows of Prejudice support the predictability of this “pullback” that everyone, including me, was waiting for.
Best of luck out there today.
- XLY – SPDR Consumer Discretionary—TRADE and TREND remain bullish for XLY. The US economy is showing faint signs the steep plunge in economic activity that began last fall is starting to level off and things are better that toxic. We’ve been saying since early January that housing will bottom in 2Q09 and that “free money” for the financial system will marginally improve the US economy in 2H09, allowing early cycle stocks to outperform. The XLY is a great way to play the early cycle thesis.
- CAF – Morgan Stanley China Fund— A close end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.
- EWD – iShares Sweden—We bought Sweden on 5/11 with the etf down on the day and as a hedge against our Swiss short position. Sweden is up a healthy 16.2% YTD and has bullish fundamentals. The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden’s sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up.
- XLK – SPDR Technology — Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last eight weeks. As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (and the game changing ORCL-JAVA deal). The other big potential catalyst is that Technology benefits from various stimulus packages throughout the globe – from China to USA. Technology will benefit from direct and indirect investments.
- XLV – SPDR Healthcare—Healthcare looks positive from a TRADE and TREND duration. We’ve been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade.
- VXX – iPath VIX— The VIX is inversely correlated to the performance of US stock markets. For a TRADE we bought some of the Street’s emotion on 5/4, getting long their fear of being squeezed.
- TIP - iShares TIPS—The iShares ETF, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
- GLD – SPDR Gold—We bought more gold on 5/5. The inflation protection is what we’re long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.
- EWJ – iShares Japan –We re-shorted the Japanese equity market via EWJ on 5/6. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction—the government cut its forecast for the fiscal year to decline 3.3%, and we see no catalyst for growth to return this year. We believe the BOJ’s program to provide $10 Billion in loans to repair banks’ capital ratios and a plan to combat rising yields by buying treasuries are at best a “band aid”.
- EWW – iShares Mexico– We’re short Mexico due in part to the media’s manic Swine flu fear. The ETF was up 7% on 5/4, giving us a great entry point. The country’s dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country’s main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country’s economy is under serious duress.
- DIA – Diamonds Trust- We shorted the Dow on 5/4 for a TRADE. Everything has a time and price.
- IFN –The India Fund–We have had a consistently negative bias on Indian equities since we launched the firm early last year. We believe the growth story of “Chindia” is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we’ve followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit.
- LQD – iShares Corporate Bonds-Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.
- EWL – iShares Switzerland – We believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials. Switzerland has nearly run out of room to cut its interest rate and due to the country’s reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.