The Smartest Guys in the Room Scream, "Get Into the Market!"

By Todd Harrison  FEB 08, 2012 10:20 AM

Turnabout is fair play.


Seems that I was busy doing something close to nothing but different than the day before. That's when I saw her, ooh, I saw her; she walked in through the out door, out door.
-- Prince

Seven weeks, or 35 trading sessions, of which three were bank holidays.  That's 32 trading sessions at six and 1/2 hours per session.  That's 208 hours of open market movement since December 21, 2011.

I note this stretch of time to highlight the mirror image of investor perception, for on that date The Smartest Guys in the Room Screamed, "Get Out of the Markets!"

Michael Platt, the über-savvy founder of BlueCrest Capital Management, a $30 billion hedge fund with pristine historical returns, was effectively all-cash.

Mohamed El-Erian, the astute CEO of PIMCO, and his colleague Bill Gross, the biggest bond manager in the world, waxed poetically about massive and mounting risks in the marketplace as a precursor to their Tale of Twin Tails.

Fund managers across the land were covering up, protecting assets and raising cash.

I pay attention to these types of things as I, too, have been all cash in my long-term bucket while trading two-sided, sometimes in size, when I foresee advantageous risk/reward, as we alluded to the very same week the above-mentioned vibes were dominating the mainstream market mindset.

Thirty-two sessions.

Yesterday, Nouriel "Dr. Doom" Roubini flipped a very large switch, denouncing the downside as he climbed aboard the Matador Express.  Courtesy of (emphasis mine):

“We’re a believer; we’re celebrating. We think the rally has legs,” explained Gina Sanchez, Roubini’s director of equity and allocation strategy.  She told CNBC that their firm currently recommends being overweight equities and playing cyclical areas of the market such as technology. “Also we’d take some tilts into staples and telecom to collect yield. And we’d also be overweight ags and livestock. Generally we’d take advantage of the risk rally....investors have months to make money."

Fair enough; people are allowed to change their minds, particularly when global policymakers continue to change the rules of engagement in the middle of the battle. 

And there's this little ditty, to be time-stamped and filed away for future reference.  Blackrock (BLK) CEO Larry Fink -- a sharp cookie in his own right -- blasted on to the scene this morning to offer that investors should have 100% -- yes, 100% -- of their investments in equities because of valuations and their relative attractiveness to bonds.

Now, you won't get any argument from me on the fixed income side; the easy money was made there a long time ago and you always want to leave a party -- or an investment -- when you're having a good time. 

The conundrum, of course, is the stock side of the equation, both in terms of the validity of the argument (betting on a liquidity-fueled rally dependent on government drugs despite the cumulative imbalances) and the timing (if you buy in to this thesis, is it necessarily the right time to dive into the market itself?).

I don't profess to have any hard answers -- my crystal ball is in the shop -- but I can, and do, share what I'm doing in real-time, for better or for worse.  I fully participated in this particular rally, trading entirely from the long side until last week, when I took a hickey for a momentary lapse in discipline (it happens, and while we all trip, the goal is not to fall).

Yesterday morning, I spoke about the potential for Dangerous Curves Ahead and the emotional continuum of denial, migration and panic.  And at the risk of being held to task, I eased into a 25% short position in both the S&P and NDX (April paper; stamp a ticket: S&P 1346 and NDX 2533) late yesterday when the tape turned higher and edged toward our S&P 1360 price target.

I've always been early in catching cusps -- at one point in my career I remained stubborn and paid a handsome price -- so trust me when I tell you that I share this fare with all due respect; I know all too well that if I don't stay humble, the market will do it for me.  Still, when I see an about-face of this degree -- in 32 sessions, no less -- I feel like we've seen this movie before.

Savers get punished at the bottom and investors get screwed at the top.  Rinse and repeat, over and over and over again.

Of course, time and price are the arbiters of variant financial views and we'll know soon enough whether there are any bears left to be scared.  I will, however, point to the Gallup Poll we highlighted yesterday, juxtaposed against a chart of the S&P, which demonstrated that this degree of optimism was last seen last February, and the attendant market reaction.

Where you stand is a function of where you sit but know this: It's not your fault!  The smartest guys in the room screamed, "Get out of the market!" in December; 32 sessions and 15% ago. 

Now, a new battle cry has emerged for investors to pile into stocks -- not just with some of your money, but all of it -- and while that may prove to be sage advice, it's got the path of maximum frustration written all over it.

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Twitter: @todd_harrison

No positions in stocks mentioned.