Alpha's Not Earned From Riding the Tides

Includes: DIA, QQQ, SPY
by: David Schrader

Courtesy of our Federal Reserve I am requiring myself to pen an article regarding my outlook on the stock market. My previous article regarding the economy still applies. However, one thing I've learned in my short years is that the stock market rarely ever ebbs and flows in unison with the economy. Expectations determine stock market prices more often than stated facts.

I still see great economic suffering coming down the pipeline. This has become drastically more prevalent since the insurers have come under intense financial pressure. Despite this, in terms of the stock market I'm beginning to come around. While we may still have a few large selloffs in our immediate future, the Fed has seemingly decided to further the continuation of the asset bubble/recession cycle. In the good old days, which for me were the 90s (I know, you all hate me now), I saw one of the greatest asset bubbles ever occur in the tech boom. From what I've gathered the economic cycle is supposed to boom and then bust but rarely to the severe extent that we've seen in the past decade. It's as if our economy is beginning to enjoy the rapid increases in volatility that our financial markets are currently experiencing.

Back to now. I read on Bloomberg the other day that over 40 of the world's indices fell into an official bear market with many others no more than a few percent above the magic mark. The Shanghai Composite is approximately at its average bear market decline level of 30.74% as determined by an article found on Seeking Alpha. The Fed has lowered rates by 125 basis points in the past twelve or so days, pumping liquidity back into the market as best they can. Negative investor sentiment is high, very high. Financials have seen a strong bounce off of their lows although I do expect those lows to be tested within the next month. If those prices provide support for the majority of financials then "Long's the word" because this market is beginning another rapid expansion. It's difficult for someone such as me to swallow this pill - the pill that the market's participants are willing and able to shun such negative factual and potential economic news and dive back into the market. However it's those who adapt at psychological peaks that earn alpha, not those who ride the tides.

Word of Caution: I would hedge any long exposure due to the limited-but-legitimate potential for a stock market crash. We're too close to the edge of the cliff at this moment in time to not wear a safety harness. I would pick up some OTM index puts and still maintain a respectable level of cash.

Disclosure: I own Mar 94 TLT Puts (and wishing I kept my QQQQ puts from yesterday)