Ignore Your Urge to Buy Into Strength

In my opinion, the best comedy ever was the sitcom Seinfeld, and one of the most hilarious episodes was “opposite George." (Click here for a clip and a great laugh.) In this classic episode, George Costanza says to Jerry Seinfeld (and I'm paraphrasing): “It’s not working Jerry, it’s just not working. Every decision, every instinct, has been all wrong.” Jerry later says, “If every instinct you have is wrong, then the opposite would have to be right!” George replies “Yes, you are absolutely correct so now I will go and do the opposite of what I think and feel.”

2009 has most definitely been an “opposite George” type of market, especially since the market bottomed in March. As the whole financial system appeared on the verge of a collapse, bearish investor sentiment on the AAII polls hit a record high of 72%. At the time, Paul Volker and other famous men in high places were on TV warning of the systemic risk to the global economy. This was clearly an “opposite George” moment for all investors around the globe. Every fiber of nearly every investor’s being was urging them to get out and to stay out. And then came the “opposite” moment: The market began its monumental rally.

As the horrific economic data continued to pile up throughout the year, with reports of mass foreclosures and record bankruptcies, stocks rallied. A most recent example was last Friday’s horrific jobs data that was soon followed by a new high on the Dow Jones Industrial Average for the year.

The bulls are very confident now, especially after the market glided through the seasonally tough months of September and October rather safely. Now they’re being paraded all over the TV, saying “stocks are entering a seasonally very strong period so buy, buy, buy.” This is understandable because November 11 through December 5 has had a perfect track record of success with 12 of the last 12 years having been profitable. During that few weeks timeframe, the DJIA moved up on average 313 points. Is this another “opposite George” moment? Maybe.

After being loud and proud of the correct bearish market calls in 2007 and 2008, we bears have recently felt like George Costanza. Bears have had good reasons to feel confident, sounding dire warnings in September, October, and especially now. Here are just a few:
 

• Washington appears completely out of control as deficits continue to explode at mind-boggling levels. As China builds wealth hoarding gold and copper, the US continues to pile on more debt to pay for all its Wall Street bailouts.
  
  
• Foreclosure inventories continue to climb upward as millions of Americans are losing their homes. This is causing bank failures to pile up. The real estate depression is deflating household net worth faster than the Fed can create money to replace it.
  
  
• The real prospects of rising inflation are showing up as the US dollar hits new yearly lows and gold hits new all-time highs. It’s starting to look like the 1970s era of stagflation.

All who have traded in the Greenspan/Bernanke era have once again witnessed what a massive tidal wave of global liquidity can do to a fiery volcano of economic deflation. We’ve consistently seen the heavy hand of the Fed in all past crises events as they lift markets by cutting interest rates and flooding the globe with liquidity. Just as a tidal wave can toss a building off its solid foundation, so too can a tidal wave of liquidity tear America off of its once-sound financial foundation. We all know the Fed is great at creating liquidity bubbles, but has the world already forgotten that excessive liquidity is what almost sent the world into financial Armageddon? All seasoned market bears are now watching “helicopter Ben” and saying “here we go again."