The Other Side of the Ride

“Six bucks and my right nut says we’re not landing in Chicago.”
--Del Griffith, Planes, Trains & Automobiles

Did you ever see the Seinfeld episode when George decides that every decision he ever made was wrong and he resolves to do the complete opposite of what he would normally do?

White becomes wheat. Tuna fish becomes chicken salad. Mayonnaise becomes mustard.
Such is the trading mindset as we play mental tetherball with a litany of financial topics on a daily basis.

Are we in a recession? Is this a bear market? Have commodities gotten ahead of themselves? When will real estate bottom? Is tech breaking out?

Each day introduces unique opportunities as we edge our way through the bipolar stroller and attempt to capture disconnects between perception and reality.

One of the best tidbits of advice I received as a young buck was to put yourself in the shoes of the person on the other side of your trade. See what they see. Think what they think. Keep your friends close and your counter-party closer!

In April, we spoke about 35 reasons why the market, while hitting “a” bottom, hasn’t hit “the” bottom.

Last week, we offered fresh thoughts on why it might make sense to sell in May and go away.

Today, consistent with our never-ending chase to see both sides of every trade, I wanted to offer five things the bulls are banking on. I share these vibes with the understanding that I expect more downside but respect the upside.

Tainted Love

Hank Paulson and Ben Bernanke have a clear mandate. They’re willing to mortgage our future with hopes that a legitimate economic recovery takes root. We’ve seen this movie before (on the back of the tech bubble) but memories are short given our immediate gratification societal mindset. They’ve got deep pockets. Interest rate cuts, Auction Facilities, discount windows, shifting collateral parameters, Working Groups on Financial Markets, interest on bank reserves, rebate checks, open-market operations and repurchase agreements are all at their disposal.

And if those don’t work, they seem intent on inventing intervention that does. We’ve written extensively about financial engineering and the inherent dangers thereof. The Federal Reserve balance sheet continues to drain as they attempt to fund the banking system. There are only so many bullets left in the gun and the last one will likely be pointed inward.

Still, we must respect the claws of a cornered animal. We’ve passed the point of no return and the government will do everything within (and potentially beyond) its powers to ensure the finance-based global balls remain in the air. You don’t have to agree with it, you simply have to respect it.

Let’s Get Technical, Technical

In a reactive tape, technical analysis assumes a greater importance in the collective metric mix. The quantifiable nature of that approach allows traders to define risk and there’s comfort in that, particularly in an unsure world.

The Transports held TRAN 5000 despite the FedEx (FDX) preannouncement. The Dow Jones Industrial Average recaptured resistance at 12,800 in the face of Hewlett-Packard (HPQ). The Russell 2000, NDX and S&P are thisclose to mounting their technical hump (above 735, 2000 and 1405, respectively).

There are four primary metrics (fundamentals, structural and psychology are the others) and we would be wise to remember that technicals remain a better context than catalyst. With so many eyes watching the charts, however, the potential to self-fulfill an upside thrill remains a viable outcome within our probability spectrum.

Stocks Don’t Lie—People Do!

The reaction to news is more important than the news itself. Between AIG (AIG), Fannie Mae (FNM), FedEx, crude, geopolitical unrest, housing malaise, derivative exposure, technical resistance and complacent ranks (VXO 19), the market has (had) every reason to melt like a snow cone on a summer day.

It hasn’t—yet—and that might be offering a valuable clue in the near-term.

To be sure, we must respect—not defer to—the price action. Extrapolating past performance to future results is a dangerous exercise, particularly in an environment where risk continues to cumulatively build.

If they “can’t get ‘em down”—and that sentiment has started to percolate in trading circles—human nature will likely chase them the other way. If and when that happens, look for reactive rationalization in front of the looming elections and upcoming Olympics to make the rounds.

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