Monday Morning Quarterback: The Summer of Discontent
Investors wrestle with conventional wisdom in unconventional times
A sense of normalcy swept through my soul this weekend. Following a slow summer Friday-the tenth straight session the S&P closed within 1% of 940-my requisite respite included the laughter of little kids, the Harrison Ping Pong crown and "Run L.A!" capturing their 15th NBA championship.
It seemed like old times. Old, reliable, enjoyable times.
Almost two full years after we spotted something seriously amiss, conventional wisdom has embraced the diagnosis we shared in September 2008: That the government, in an attempt to save the system, bought the cancer and sold the car crash. Nestled within those thoughts were the following observations:
Price discovery is a process rather than a point and a multitude of factors will affect the ultimate outcome. While we can debate the merits of the proposed plan, we must remember that it introduces the possibility of regulated containment that didn't otherwise exist.
Before the patient can recover, he must be stabilized. The government initiatives will introduce a plethora of unintended consequences-there are no quick fixes or magic pills-but the best hope, at this stage, is to stop the bleeding before attempting to cure the cancer.
Fast-forward nine months. After falling an additional 44% from the time we shared that fare and subsequently rallying 41% off the nadir, the S&P remains 20% below where it was when we started this dance. If you apply traditional definitions, we've seen a bear market and bull market within the context of a bear market…in less than ten months.
What's it all mean? Other than conventional definitions need not apply in unconventional times? Simple, we're on a long twisty road and the path that we take pales in comparison to the destination we arrive at. Indeed, if we take the intraday moves from September to March and tack on the rally since then, we're looking at upwards of 300% worth of price swings. 300%.
There is widespread debate whether this is a new bull market or a secular bull within a secular bear (I'm in the latter camp). Ditto the discussions about deflation vs. hyperinflation, a dynamic we've discussed since 2002 (true story). Bulls are brazen, bears are bumming and few folks are content with their performance given the recent rampant run.
To this, I will say to one and all, chill. If we attempt to digest everything at once, odds are we'll drown in a sea of information and misinformation. We'll never make as much as we could and we'll always lose more than we should, the classic conundrum that is the cost of doing business in the financial markets.
I will simply remind you of what many in Minyanville believe will be the most important concept of 2009: Financial Staying Power.
The Metric System
It certainly seems we've sidestepped the car crash and much of the rally is systemic risk being removed from the market. I will humbly offer two caveats in that regard. First, the greatest trick the devil ever pulled was convincing the world he didn't exist. Second, assuming the "best case" scenario (we sold the car crash), the system remains infected with a potentially fatal disease.
I know it's not a popular message but to that I'll ask: When's the last time the populous approach was the profitable one?
One step at a time as we assimilate our primary metrics. Without further adieu:
- Psychology: The emotional pendulum swung viciously since the March lows, akin almost to a horizontal guillotine. Fund managers wore "CASH" as a badge of honor and have been pricked by the other side of that prudence. We may be in the last phase of denial, migration and panic; the true test for the tape will arrive after the second quarter letters are penned.
- Structural: There's WAY too much debt in the system, foreign-holders of dollar denominated assets are diversifying currency risk, we've got an obscene amount of government intervention (and the need to eventually wean off it), a seismic readjustment remains viable and the geopolitical spectrum is fragile. Other than that, not much is going on.
- Technicals: We've been talking about the bullish basing above S&P 920 and massive resistance at S&P 950. With so many eyes upon the same two levels-and massive stops set on either side-there is vacuum potential when either is breached, if only for a trade.
- Fundamentals: We saw positive data points last week in Texas Instruments (TXN), Home Depot (HD) and Qualcomm (QCOM) but reaction to the news was muted at best, lending credence to the view that the 40% rally off the lows has discounted the relative uptick in business.
My back-of-envelope assimilation remains the same. There is the potential for a false breakout above S&P 950 as performance anxiety percolates. That is couched in the context of broader and ever-present risk and is consistent with the "W" we've been talking about, one that could see the market traverse lower into the fall.
If-and this is the biggest if of the year-we can mount that level, the potential for another 50-100 S&P handles exists, perhaps quickly. If Boo can hold that line and play whack-a-mole with the bulls, we may well have seen the Widow's Peak of 2009.
I'm often early so I'm allowing for some wiggle room with regards to time and price. My stylistic approach-trading with a scalpel rather than a sword and risk definition as a matter of course-will keep me in the game if I'm wrong (as everyone is at times). Nobody is smarter than the market and we must remain humble or the tape will do it for us.
In terms of the here and now, a quick sniff of the premarket finds the critter compass skewed Boo. The dollar is a full percent higher (following a phone call from Washington to Moscow?) and Europe is down a deuce across the board.
Stateside, I'll note that Research in Motion (RIMM), as I write, is only off 30 cents which, juxtaposed against the fugly futures, could foretell demand.
Finally, keep an eye on the pennant formation in the financials for as go the piggies, so goes the smoke.
Old School Minyans remember our snazzy summer sojourns. There was Minyans in the Mountains at Crested Butte, Colorado. Then followed MIM2 in Ojai, California. The hat-trick then completed with MIM3 in Vail, Colorado.
We made a conscious decision to hang up the hiking books as we entered '07, eying the incoming perfect storm, and choosing instead to batten down the hatches and help ye faithful navigate the crosscurrents. We shifted our community focus to philanthropy, hosting The Critter's Choice Awards, Festivus and The Emmy Award Winning Festivus to Benefit Children's Education this past December.
But alas, I digress. The purpose of this post isn't to share some of Minyanville's finest memories through words and pictures (although we can do that too). The sole focus of this Buzz is to bring us back-way back-to what turned out to be the winning run in our world famous Minyan Softball Battle, captained by John Succo on one side and yours truly on the other.
You make the call-was I safe, or was I out? I'll draw your attention to two simple truths. First, the ball isn't actually touching the glove (true story). Second, a tie goes to the runner.
We're interested in what you have to say. Feel free to weigh in and we'll tally the count.
Good luck today Minyans and think positive. Profitability begins within.
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 firstname.lastname@example.org.
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