Seeking Alpha
Special situations, contrarian, event-driven, bonds
Profile| Send Message|
( followers)  

The level of pessimism in the market regarding the ongoing European Union drama, the Euro currency, China slow-down, BP (NYSE:BP) oil spill, etc. etc. has reached a point where all the sheeple who are easily frightened (aka the weak hands) have already folded in despair. The MSM pundits attempting to drum up stories and fear by constantly bombarding the common investor with negativity have done their job. The market is down ~14% from it's highs recently. I now forsee a current period of consolidation which will be followed by a push upwards to new highs on positive macro/global/economic news. In particular: A perceived 'solution' to the European crisis and positive economic data here in America will provide legs to a new market rally.

As astute investors have seen throughout history, being a contrarian is the surefire way to outperform the averages. When the market kept breaking new highs on flimsy premises I kept buying more VIX at multi-year lows. When the market rolled over and the commoners panicked I sold my VIX (NYSEARCA:VXX) for a nice profit and floated bids out on companies I wanted to own long-term at prices I was happy with. I have since filled in many of my positions and am currently profitable in the majority of them.

For the medium term, I see catalysts that will provide the stock market legs will be:

  1. The devaluation of the U.S. Dollar, coinciding with a possible rally of the EURO and the eventual appreciation of the Yuan (Renminbi). The amount of U.S. Debt is staggering and eventually we have to inflate our way out of it, and/or yields must go higher to reward the fools who would even consider buying U.S. Debt.

  2. The coming rotation out of bonds and into stocks, commodities, and other asset classes. It is widely known that bonds were one of the few asset classes to have record inflows in the face of the rally off of the March 2008 lows. Stock cash inflows have been tepid and the common investor still does not trust the market. Many postulate that bonds are the biggest bubble in the current environment, and common sense tells us that rates here in the U.S. have no where to go but up. The question now is "when?" In a rising interest rate environment the last place you want to be parking your cash is in bonds. I expect a broad transfer of wealth out of bonds into either high-yielding, energy-related, defensive, or other equities that have pricing power over their products/services.

  3. The pundits and headlines dominating the news sources constantly spout negativity, fear and doom. I have learned that when everyone else is bearish and negative on the markets in general, then you usually want to start your buying spree. There is a reason the average investor sells the bottoms and buys the tops. It is much easier for the human psyche to follow the pack decision, and possibly lose money, than it is to take the opposite side and fear being left out. This is a genetic trait that will not likely change soon. One must check their emotion at the door and use the analytical side of our brains. In essence, be a computer: Base your decisions on logic, using all past, present, and perceived future stimuli, and then mix in a dash of your own 'gut' intuition to make the 'correct' trade. In addition, no one can time the market perfectly, but you don't have to, just be better than the other 90% out there.

And for a global/macro pairs trade that I am currently recommending for wealthy clients:

Long Chinese Equities (FXI, HAO, China Security & Surveillance (NYSE:CSR), China Natural Gas (OTC:CHNG), Concord Medical (NYSE:CCM), Advanced Battery Technologies (OTCPK:ABAT), ZST Digital (OTCPK:ZSTN))

VS.

Short U.S. Government Debt (TBT, Short TLT, Short TLH, Short IEF)

I will go into further explanation, but that requires an entire article of it's own, check back soon........

Disclosure: Long CSR, CHNG, CCM, ABAT, ZSTN

Source: 3 Reasons the Market Is Headed Upward