Three Things the Bears Need to See

By Todd Harrison  FEB 06, 2013 12:45 PM

Talk of a market turn sweeps the Street.

 


Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Greetings from Minyanville Headquarters, as I settle back into our digs after our quarterly board meeting. I strapped into my turret mid-morning to find some pressure overseas -- a breach of DAX 7600 opens the door to DAX 7400 --and a mixed bag of stateside stocks.

I also stumbled across the email below, from Minyan Gian Marco from Italia:

"Ciao Todd, Dr. Marc Faber is long stocks (and a lot of gold). Nassim Taleb is long stocks (and out-of-the-money puts). Nouriel Roubini is long stocks (and is looking for 15% annual gain). Really? Doesn't this feel a little bit like capitulation?"

It's an interesting question, if only because those esteemed folks gained global notoriety as bears, and they're all now bullish. In terms of the more traditional definition of capitulation, we would need a larger sample set; perhaps -- perhaps -- John Q. Public must again buy into the bubble before the bust.

As someone who loves to Question Conventional Wisdom, however, it doesn't take much to raise my eyebrow (which is both a blessing and a curse). Indeed, as we discussed last week, the price action has been pristine -- sector rotations have trumped outright migrations -- and it feels like fund managers continue to chase their benchmark bogies (which started mid-November, and the S&P (INDEXSP:.INX) has rallied 13% in less than three months).

So, what would the bears like to see, in terms of an early smell of a downside tell? Three things, in my humble opinion:

1. Market darlings getting taken out back and shot--and we can check that box (Apple (NASDAQ:AAPL) is off 34% since September -- although it is trying to fill the upside earnings gap to $512, per the chart below).



2. The financials -- up 18% in that same three-month span -- have bent, but have not broken. The bears need to see this complex take a hard right to the chin as they encapsulate the cumulative compression in our finance-based global economy. BKX (INDEXDJX:BKX) 52 is the level to watch there, per the chart below; below that, and the some beads will finally begin to build on the bovine brow.



3. A blow-off phase, as opposed to the steady grind higher, which has effectively worked off overbought conditions as a function of time rather than price. I thought we might have seen this with a pop through S&P 1500 (perhaps to 1520 or higher) but it's been a tug-of-war, not a full-fledged retreat. Remember, most every market move is defined by three phases: denial, migration, and panic.

With that said and respected, market tends to meander along the path of maximum frustration so past prologues aren't always predictive. And, as traders, we don't need to call the tape—while that grabs headlines and makes people feel important, it pales in comparison to a steady approach to risk management. This I know, as my market feel hasn't been anything to write home about but I'm chipping away at solid performance with two-sided bite-sized bets in stocks like Facebook (NASDAQ:FB), BlackBerry (NASDAQ:BBRY) and yes, even a wild ride through cannabis land.

As we like to say in Minyanville, there's no shame in admitting it's hard, there's only shame in pretending it's not. If you're a fund manager with OPM (other people's money), you're sweating relative performance 24 hours a day -- that's what you get paid for. If you're an individual investor who isn't mandated to carry risk, you have the luxury of patience and the necessity of discipline.  There are a lot of traders (or black boxes, as the case may be) standing in a circle shooting at each other; as the dust settles, more and more opportunities will emerge for those who continue to fight the good fight.

Or at least that's my take, after 22 years of staring at these trippy screens.

Answers I Really Wanna Know:
R.P.

Twitter: @todd_harrison

No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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