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Russian Roulette


Barring adverse news from the Middle East, portfolio managers WANT the market higher into quarter end.


Good morning and welcome back to the loaded gun. The bulls dug down deep yesterday and summoned the strength to keep the bears at bay. Boo was smacking his chops after licking Monday's Minx, but he knows that sharp spikes higher rarely reverse on a dime. While bottoms are typically emotionally charged "points," tops are usually emotionally draining processes and, to a degree, yesterday's bovine bounce back was to be expected. This morning, the big question on everybody's lips is: What now?

We often talk of the difference between living in the past and learning from it and this period perfectly illustrates that point. Despite the constant references to the 1991 Gulf war, our current juncture is unique in many ways. For one, we're still digesting the overcapacity created by history's biggest financial bubble -- something that was a pipe dream when Daddy Bush first marched towards Baghdad. The internal comparisons -- from valuations to cash reserves -- are vastly different than they were the first go 'round and, thus, the foundation isn't as stable.

This brings us to an interesting conundrum: If the environment is fraught with so much risk, why has the market reacted with such a stiff lift? Can it be that we've begun scaling the infamous wall of worry that precedes bull markets? Will this rally proved to be the exception that overthrows Boo's recent rule? Is this time indeed different?

There's no shortage of opinions out there and, after watching the bubble redefine the paradigms, I've learned to keep an open mind. With that said, I will again offer that the opposite of love isn't hate, it's apathy. And I believe THE bottom will be characterized by widespread indifference. I've watched closet bulls emerge many times over the past few years. They were vicious (and rude) when the Fed first started cutting rates and continue to beat their chests each time the tape flexes it's muscle. Just as a watched pot never boils, I don't think a watched market can ever bottom.

That's not to say there won't be periods when trading from the long side (with Hoofy) is warranted. How you, as a Minyan, approach those times is purely a function of your horizon. Active traders who make their living in the guts of the tape feast on those moves (either way). The trick -- and it is a trick -- is to identify when those phases emerge and make hay while the sun shines. If you're a longer term investor, however, your needs and wants -- and therefore, your course of action -- is uniquely different.

I don't have any answers but I surely have my sensibilities. Since 2000, there have been many times when the equity sirens have called my name but thankfully (and luckily) I erred to the side of caution. Sure, there are "trades" to the long side and capturing those opportunities is part of my job. However, taking a step back and looking at the big picture, I (humbly) believe we remain in the earlier innings of this bear market and I feel a duty to communicate those thoughts.

Again, my friends, I'm a trader ,and my job dictates that I view that big picture as a series of little pictures. When push comes to shove, however, my instinct is to err on the side of caution and keep my right hand up. I'll surely miss moves at times but as you know, opportunities are made up easier than losses. And there will always be more opportunities -- we just have to make sure that we're around to see them.

Good luck today.

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