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The Short End of the Stick


Good morning, and welcome to the Minyanville Marathon. Critters have traveled from all over to join our humble race and they'll need to pace themselves if they hope to cross Friday's finish line. This week's challenging course will include five industry conferences, Government elections, Elmer (FOMC), Cisco's earnings and economic releases all scattered along the route. This is what we've been training for, team, when mental toughness and acute precision will differentiate us from the crowd. Stretch those legs, drink plenty of water and prepare to dig deep-the starting gun is a few scant hours away.

They say that it's better to be lucky than smart and nowhere is that more evident than in the stock market. In a world where you're only as good as your last trade, reputations will vacillate as a function of price and humility is only a pin prick away. The icons of the bull market have slowly been lynched, one by one, as angry masses hunt for the witch that made their bank accounts disappear. Welcome to Salem Minx, circa 2002.

There are guilty people who committed illegal acts and there is no condoning what they've done-they deserve the harshest punishment allowed by law. Money has a way of making people do bad things and the bubble's siren lured all types of miscreants to the market. That said, you're the one that must live with your investment choices and the onus is on you to make sound financial decisions. Over the last few years, investors got caught up in prospects and promise while failing to understand that profiting is a privilege and not a right. By the time the sirens stopped singing their sweet alluring song, there weren't enough seats left to go around.

It's easy to belabor these points when the market is melting and the averages are down. When we're in rally mode, however, these topics assume an entirely different complexion. There is a fine line between a mistake and a lesson, with the simple ability to learn from the past differentiating the two. Over the last few years, we've experienced vicious bear market rallies and, each time, there was talk of the bottom being put in place. There was surely money to be made during those bullish phases and, make no mistake, we must try to make hay when that sun shines. We must also remember that the opposite of love isn't hate, its apathy-and THE bottom won't occur until people stop trying to call it.

We enter today's action with widespread talk of a breakout, seemingly benign data points on the horizon and performance anxiety running rampant. If we've learned anything, it's that these phases always seem like new paradigms...until they don't. We've been focusing on these resistance zones for two weeks and it would be glib to ignore them now that they've been breached. The combination of technical triggers and psychological limits could certainly create a self-fulfilling bid to the market. It remains my humble opinion, however, that the failure of this rally is a function of "when" and not "if." I will continue to look for opportunities each day (that's what I do), but my overall view on the market remains the same. As such, timing, discipline and patience will be essential ingredients in the trading recipe.

Why is Boo being such a stubborn bear? Well, for one, the slope and velocity of the rally raised some eyebrows in the ursine camp. We know that the most vicious rips occur in bear markets and this latest lift certainly qualifies as such. The psychology shift also raises a flag as it seems the only fear in the market is not being invested-particularly now that we've "broken out." Selling hope and buying despair has repeatedly proven itself as the money trade when short-term sentiment levels have reached extremes. Finally, we must ask ourselves if the incremental changes to the underlying metrics warrant the latest price appreciation. Looked at another way, if I told you on October 10th that you could make sales at these levels, what would you have said?

While trading focuses on the journey rather than the destination, we must always juxtapose our broader thesis against the daily fluctuations. The contrarian's view will seldom win popularity contests but, let's face it, the herd mentality has led many to slaughter. I would never cling to a thesis because it's in print and this column won't act as a venue of justification. I know, as you do, that the only religion on Wall Street is making money. However, there is a difference between adaptation and acquiescence and while the skies may seem clear, I'll surely be keeping an umbrella close by.

I'll be at the oral surgeon this morning getting my stitches removed so please understand that my next post will likely be after the opening bell. We've got a long five sessions in front of us so take a deep breath and remember to pace yourself. Slow and steady will win the race.

Good luck today.
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