Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Still in the reality trade


On the ride up to my office in the elevator today, I saw a quote from Oscar Wilde on the electronic screen inside that was something like...experience is the word that men use when speaking about their mistakes. That got me thinking that the greatest mistakes (I mean experiences) I have made were a result of me not liking what was happening and trying to force my way into something I can't control. One does this by saying that it would be wonderful to have a new bull market and then finding a reason that justifies the view. The way that I normally make this mistake is by trying to play trader instead of strategist.

The great desire among most of us in this line of work is to be seen as "nailing the call" for an important market turn. I wrote last Thursday that I am looking long and am waiting for at least some of the classic signs that an intermediate-term bounce was coming based on prior bounces during this bear market.

I was speaking to a few accounts (and friends) yesterday about the fact that I can see absolutely no reason to be a buyer of stocks here - not one. The only catalyst anyone can come up with right now is that the market is oversold and sentiment is turning negative. True, but it was on January 27th with the S&P 500 at 847 as well. As I said, I can find no compelling reasons to be a buyer. Typically, when I can find no reasons to be a buyer, it is time to be a buyer. The problem I have is that would be a trading call and as I said above, that isn't what I perceive my role or strength to be. Frankly, over the past few years I know where to look for guidance on that and now write with him.

Every instinct I have is to buy because there are no reasons for it, people are negative and this grind stinks (even for short side people). Then I remember that if my instincts were so good, I wouldn't have so many great experiences (thanks Oscar). I have learned that it is OK to miss the first bounce as long as I am following my intermediate-term strategy and the evidence is there for something more than a one or two day wonder. Given the various proprietary and public indicators that I track, none of them suggest anything more than a snapback type rally can occur at this juncture.

Since the October low I have written many times about the three stages of market movement after an intermediate-term low is reached.

1. The Perception Trade - This stage begins when market sentiment and indicators agree that it just can't get any worse. The combination of technical evidence, shorts pressing and zero buying interest leads to such a washed out state that a bounce goes further and lasts longer than most expect. While in this stage, no one expects real evidence that the backdrop is getting better because people are trading off the sentiment that the backdrop can't get any worse.
2. The Twilight Zone Trade - This stage begins once the market becomes seriously overbought on an intermediate-term basis and the proximity to real direction changing news gets closer. In this stage, buyers don't want to chase stocks higher because the market is overbought and there is no real news to sustain even higher prices. Basically, the "it can't get any worse sentiment is no longer valid. In addition, sellers are not aggressive because the market had been strong and they don't want to get run over in case something might have changed in the overall market picture. During this stage there is no way to prove either the bull or bear case, so a trading range develops.
3. The Reality Trade - This is the period where the news moves closer and the outcome becomes more identifiable. This period can either be good or bad depending upon the news. Obviously, over the past two years the news has been generally horrible and therefore the reality trade has been negative. One only know the market has moved from the twilight zone to the reality trade because there would have been a meaningful breach of the upper or lower end of the trading range associated with news.

I highlight the three stages now because clearly the market is in the middle of the reality trade. As I said above, after four down weeks and a lot more grinding pain, it feels like it can't get any worse. That clearly makes me want to look long. The key is to wait for the evidence that it can't get any worse before making a major commitment and there continues to be a limited amount of that - YET. The last two reality trades (June-July and Sept.- Oct. '02) never had anything more than a few day spurt until the indicators reached extreme levels that I outlined last Thursday.

While I may miss a little upside, past experience has taught me not to guess too big, too early.
< Previous
  • 1
Next >
I wish I didn't have so much "experience"
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos