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We Won't Get Fooled Again!

We Won’t Get Fooled Again!

Up until April 23rd, the bulls were clearly in charge of the game – in a big way. For three months, every single dip, even intraday dips, were met with buying as investors scrambled to get into the game. The thinking was simple. With the economy clearly in recovery, earnings on the rise, and the job market about to improve, it didn’t take much imagination to see clear sailing ahead. And with that, everyone, everywhere decided they needed to get more money exposed to the stock market.

However, less than one month later, things are very different. Whereas in mid-April it was hard to find a bear, it is now becoming exceptionally difficult to find anyone willing to admit they are even thinking about buying – or even nibbling. And with the market now having moved below its 150- and 200-day moving averages for the first time since the bull began on March 10, 2009, it is safe to say that the character of the market appears to have indeed changed.

So, is it time to throw in the towel and head to the sidelines? Normally, we’d suggest that selling after the market has declined nearly 12% on a closing basis doesn’t make much sense. However, this afternoon, we’ve decided to don our bear caps and take a look at the market from the furry side of town (can you say, “da Bears?”)

To start things off, we think THE most important thing to understand going forward is embodied by perhaps The Who’s greatest song, Won’t Get Fooled Again.

Let’s not forget that in 2008, EVERYBODY got their clocks cleaned. Mutual funds lost more than 40% on average, bonds were down, gold fell, commodities were toasted, and the average hedge fund – you know, the funds that can buy or sell anything and are actually designed to make money in all environments – actually lost more than 30%. In short, EVERYBODY was taken by surprise and was effectively fooled by the meltdown that threatened the global banking industry. This was a huge embarrassment to the hedge fund community, and thus, as the song goes, it is safe to say that these boys won’t get fooled again.

It is for this reason that everywhere you turn right now you can hear the bear camp’s arguments. Debt contagion, freezing credit markets, the EU breaking apart, self-induced depressions in the Eurozone, political upheaval, riots in the streets, and economic slowdowns top the list of macro problems the world now faces.

So, in less than one month, the bears have gone from zeroes to heroes. In less than one month, the cup went from overflowing to almost entirely empty. And in one month, traders have turned in their horns and hooves for furry suits and claws. Nowadays the term de-risking is all the rage.

It seems that everyone interviewed in any media is now bearish and suggests that this dance to the downside is going to continue. Heck, even Dan Niles, one of the best tech analysts around, told CNBC’s audience Thursday that you’ve got to be hedged. Mr. Niles, said you should “short the semis” and he warned, “a long only approach here is just plain stupid.”

Whenever sentiment becomes entirely one-sided, we normally like to get ready to go the other way. However, it is VERY important to remember that while the crowd is usually wrong at both ends of a move, it is indeed correct in the middle. And given that stocks have now fallen -11.98% from their April 23rd highs, it appears that we might be smack in the middle of this bear thing.

So, with just about everyone who survived the Great Recession having vowed to never get fooled again, we’re of the mind that this bear thing might stick around for a while. There are lots of scary fundamental reasons. However, we think the fact that no one wants to see their account values plummet – ever again – is reason enough for managers, investors, and traders alike to take action sooner rather than later this time around.

The big problem here is that it is tough to see how even the good ‘ol USofA will be able to avoid being infected by the growth slowdown flu that is making the rounds. Everybody knows that China is slowing, by design. And given that Europe is China’s biggest trading partner, well, it’s easy to see that China’s slowdown may accelerate.

And the real tricky question is how does Europe grow from here? With the EU forcing a handful of countries into a depression, how exactly do these countries get the cash to pay their bills? Hmmm…

Since this is getting discouraging, we’re going to put an end to our walk in the bears’ shoes. Yep, we get it; it’s a bearish environment and we’ll try to play accordingly for a while.

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