The Recovery and the Storm
Global economic turmoil isn't going away just yet.
They say what the market knows isn’t worth knowing. Investors around the world hope that once again proves true.
The US housing market is in its worst shape since The Great Depression.
Japan is about to declare a recession.
China is technically broken in front of the Olympics.
Iran snubbed its nose at the Western deadline on its nuclear program.
Consumers are grappling with the worst inflation in 27 years.
HSBC (HBC) Chairman Stephen Green described financial markets as being “the most difficult they’ve been for several decades.”
The Royal Bank of Scotland (RBS) is expected to post the biggest loss in British banking history.
The doom and gloom is palpable and it’s enough to make the most fervent bears run for cover.
If only it were that easy.
Last summer, Minyanville offered that if the wheels fell off the financial wagon, we were well warned.
One year later, financial stocks are down 35%, analysts have chased the market lower and the same pundits that calmly assured us to “Move on—there’s nothing here to see!” are screaming “Apocalypse now!”
As John Maynard Keynes once said, markets can remain irrational longer than investors can stay solvent. Widespread anxiety, in and of itself, isn’t a valid reason to swim against the tide.
With the markets however—as with life—the destination we arrive at pales in comparison with the path that we take to get there. Therein lies the opportunity—and yes, the risk—in trading that journey.
The Jedi Mind Trick
I offered last week that we may be seeing the manifestation of an upside agenda into the election. The two components of that dynamic were higher equity prices (so corporate America can issue secondary offerings) and lower crude, possibly to $100/barrel.
The key to affecting that reality is collective perception and that speaks to the importance of “higher lows.” Since the S&P closed at 1235 on July 15th, the bulls held higher ground at S&P 1235 on July 28th and S&P 1250 on Monday. Through a pure trading lens, those latter levels can be used for near-term risk definition.
Should they remain underfoot, an upside scamper becomes more likely with time. When and if that manifests, performance anxiety would percolate as fund managers eye their third quarter letters. It’s a bit forward-looking but that’s how the market trades and we must as well if we’re to keep up.
As discussed in real-time on Minyanville, I’ve been operating from the long side with an eye towards this evolution. It should be noted that my stylistic approach is different than it was into the July lows. At that juncture, given that the markets were massively oversold, I scaled into exposure as a function of price.
With respect to this set-up, I initially set stop-loss orders below my entry levels to keep a tight leash on my exposure. With each leg higher and each “higher low,” I rolled my stops to the underbelly of newfound support.
Successful trading is about ascertaining an advantageous risk-reward. This particular set-up, as it stands, continues to do just that.
One Step at a Time
In the end, markets will do what markets do. The only elixir for what ails us after years of financial engineering is time and price. The government will give the market all sorts of drugs but in the end, it must take its medicine.
That reality has crept into our consciousness but it’s a process until the point of collective recognition. The shifting social mood and the attendant risk reduction will last for years as learned behavior and behavioral excess is unwound. Once it has, we’ll be ready to build anew.
Just as everyone was bullish last spring and summer, however, nothing comes easy in a bear market and the crowd is rarely rewarded as a whole. We can debate our standing on the denial-migration-panic continuum but mainstream psychology is a toggle not a toss.
It’s called the path of maximum frustration. Get used to it because it’ll be with us for a while.
When we chew through this prolonged period and find our way to the other side of the cycle, we’ll likely see an inside-out recovery—one that turns investors inside out by the time we recover!
That may well include a run into the election to embolden the bulls (how I’m trading my short-term portfolio) followed by a harsh comeuppance as the bears reclaim their fame (my long-term savings remain 100% cash, backed by T-bills).
When we finally find our way to realistic economic building blocks, the recovery—a sustainable, legitimate, powerful, recovery—will look unfamiliar to many.
It will be worldwide not stateside with risks and rewards on a massive global scale.
The trick is to be there once it arrives and the ability to sync our time horizon and risk profile will greatly improve our odds of success.
Remember, the dot.com prophecy came to pass but not before shaking the foundation of the system.
Globalization will play out in much the same way once it claims its maidens.
Discipline over conviction as we continue to find our way.
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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