I have to hand it to the dip buyers – they sure nailed it yesterday.
I have been lugging around a big short and I felt that maybe, just maybe, yesterday might be the start of the much needed correction. Although I did not add to my position down into the 20 handle S&P gap lower, neither did I take the opportunity to cover any of my short. That proved to be ill advised. The morning’s big gains in my portfolio had all evaporated by the close as the bulls completed annihilated the bears.
I felt a little like Bill Hillmann, the Chicago native who co-authored the book “Fiesta: How to Survive the Bulls of Pamplona.” Bill is a longtime participant of the nine-day Pamplona street party, but recently found that the 2014 running of the bulls to be even more dangerous than his home town of Chicago. Like the shorts in today’s market, the author was gored twice during this week’s bull run.
Bill Hillman gored twice by the bulls</a> </div>
Both Bill and I should have known that 2014 is proving an especially dangerous period for idiots like us that are willing to step in front of this pack of raging bulls.
S&P 500 trading last couple of days</a> </div>
I am tempted to use yesterday’s example of the underlying strength of this market as an excuse to give up on my short. Part of me thinks that if we couldn’t gather any momentum to the downside, then maybe it isn’t ready to correct.
But then I remembered that increases in volatility are almost always signs of weakness as opposed to strength. The fact that we even gapped 20 handles lower is the important message from yesterday. Yes we did rally almost back to unchanged, but in a strong market we never gap that much lower in the first place.
So although I acknowledge that yesterday’s action was impressive, I am not going to give up on my short just yet.
There is an increasing feeling of invulnerability to the bulls. They have mistakenly placed their faith in the Church of the Fed will always save us. Have a look at the latest views of the “Legendary” Dennis Gartman:
SHARE PRICES AROUND THE WORLD HAVE MOVED HIGHER following the release yesterday afternoon of the latest minutes from the FOMC which make it very clear that the Fed’s propensity to tighten monetary policy in the near future is near zero. We may have thought that the market was over-bought and due for a correction, but we are going back to being “pleasantly” long rather than market neutral for the Fed’s wind is at our back.
Gartman represents the consensus attitude of hedge funds. They might realize that they are playing a game of hot potato, but they are too afraid to not play.
“I’m long, and I hate it,” said Bob Iaccino of Tethys Partners.
I know that bull markets love to climb a wall of worry. But it is one thing to climb a small local gym climbing wall. This market is more like climbing the world’s tallest outdoor climbing wall with no safety equipment.
Excalibur (world’s tallest climbing wall) aka 2014 bull market</a> </div>
The bulls will give you all sorts of reasons why stocks are cheap and have to go higher. They will point to the fact that many of the famed bearish strategists have consistently being wrong. On this point, they are indeed correct. Too many investors trade from one direction and never change their opinion. But the only thing worse than being inflexible in your outlook is to flip flop and change sides after a six year move that you missed! Maybe I shouldn’t be so short, I am willing to concede that. However for those that are balls to the walls long, you are playing with fire.
Don’t forget that it was almost exactly 7 years ago today that Chuck Prince made his famous “you’ve got to dance” comment.
Right now we have a corporate profits at all time highs in terms of percentage of GDP and interest rates glued to zero by a clueless Fed. We have a bull market that is 5 years old and up almost 300%. And yet this is the time to get into stocks?
For me, all I can say is – not a chance. I distinctly remember being long a couple of years ago and the feedback that I received. Almost everyone would tell me about all the reasons why stocks would not go up. Although I acknowledge that I took my profits much too quickly on that long position, the point is that the best trades are the ones that differ from the consensus opinion. Ask yourself – is it harder to be long or short in this market? Where is the peer pressure concentrated? Without a doubt, it is way harder to be short than long.
Just like Chuck Prince everyone thinks that they can time the exit…
Buying some lumber
Although I am a big bear on financial assets, I am quite constructive on the US economy. I know that this is the opposite of most market participants’ views, but this position is where I am often the most comfortable.
Most Americans are hugely bearish on the long term prospects for their housing market. I am much more constructive on the potential for US housing to continue to recover. I am running out of time this morning, so I am not going to go through all the numbers that show housing consistently outperforming expectations.
But I wanted to take a moment to highlight the fact that I am starting a long position in lumber futures. The main reason for my position is an improving US economy, but there is also an additional potential catalyst with the recent ruling by the Canadian Supreme Court.
From the National Post:
I am getting long and willing to risk all the way down to $300.
Lumber Futures</a> </div>