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Revenge of the Herds


What do you mean that Hoofy's gonna play until the cows come home?


It was later than I thought
When I first believed you
Now I cannot share your laughter
Ship of fools

(Grateful Dead)

Good morning and welcome back to spin city. If turnabout is fair play, this latest lift was a solid shot between the lines. After three years of being miserably mocked and mired in muck, the bulls have returned with a beastly bravado. Boo's blues on the rally news was long overdue -- he'd been living high on the hog (whatever that means) since the pig got roasted. The zillion dollar question now becomes: Can the bears ever bring home the bacon again?

The dynamic in the market is clear. The Fed is on a mission to "reflate" the economy, performance anxiety is running rampant and the macros are squeezing the tape higher every chance they get. While hindsight always provides clarity, it's our ability to look forward that will differentiate our results. Thus, the obvious dilemma now becomes one of sustainability. How long will this party last?

According to financial lore, the market will ultimately prove to be an efficient pricing mechanism. Having lived (and traded) through the bubble, however, we know that the path to efficiency isn't always rational. Our mission in the rain is to filter out the noise and identify the disconnect between perception and reality. The collective anxiety, married with the continued cheerleading, is now clouding the vision of bulls and bears alike.

We all know the drill -- the Minx is a leading indicator and will turn higher (lower) before we see an economic or corporate uptick (downtick). The potential for positive affirmation remains but please keep in mind that the news is typically "worst" at the bottom and "best" at the top. In other words, by the time everyone figures out that things are better (and I use that word loosely), it's typically discounted by the stock market.

From a trading standpoint, the issue is one of stylistic approach. Over the last few years, inflection points have been marked by a desire to "play that way." Perhaps it's a function of the "denial-migration-panic," I'm not sure, but the crowd typically chants "let 'em rally and I'll short 'em" and trading bottoms and "let 'em come in and I'll buy 'em" at tops. That's a textbook path of maximum frustration and a recipe for trappage.

As we edge into today's semiconductor catalysts and tomorrow's payroll data, take a moment to assess the two-sided risk. I've got my inclinations and trepidations -- I think the tape tops this summer -- but that's simply one trader's humble opinion. Identify a suitable risk profile, allow for a margin of error and, above all else, don't let the Minx consume you -- life's entirely too short.

Good luck today.
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