Will The Market Ever Go Down Again?
An honest conversation within our community.
Editor's Note: The following conversation took place today and it's being shared for the benefit of the Minyanville community.
Minyan Andy: Question for you: what makes this market go down?
Toddo: If I asked you in early March what could make the market rally, what would you have said? It seems obvious with the benefit of hindsight but at the time, there was no reason to buy—in fact, it was downright scary. I’m not saying the market will drop immediately, mind you, I’m just offering that news is always worst at the bottom and best at the top.
Minyan Andy: It feels like a dichotomy increases daily between the underlying economic conditions and the level of equities; bad news is being ignored and good news causes extreme upside reactions.
Toddo: The reaction to news is always more important than the news itself—that’s one of our primary trading mantras. What you’re referring to—the disconnect between perception and reality—is where profitability resides in the trading equation.
So it’s said, I believe the conditional elements for a downside dislocation are in place but I must choose my words—and approach—carefully while balancing a litany of scenarios within the probability spectrum. Credibility is a function of time, experience and yes, accuracy, so I’ve attempted to urge caution in a balanced manner while “seeing all sides.”
Minyan Andy: I agree with you 100% but what I can’t figure out is the catalyst? Economic numbers are clearly “managed,” earnings have had easy comps (comparable to previous periods), China pullbacks have been ignored…
Toddo: I hear ya, bro. Price always validates news but until then, discipline trumps conviction.
Minyan Andy: …Crude rising, which is perceived as a positive.
Toddo: It is, through the lens of asset class deflation vs. dollar devaluation. Just remember, while a lower dollar is a necessary precursor to higher asset classes, it’s no guarantor of them.
I’ve been operating from the short side of late—selling blips to buy dips—akin to being a salmon in a steady stream of optimism. The stylistic approach feels backwards although one could argue it felt equally askew when buying stocks in late February (I was and it did).
I’ve also been weighing whether to stay tight until we see the whites of their eyes, wondering if the path of maximum frustration will give Boo that chance. Indeed, if he were waiting on a “signal,” odds are he would have pounced last Monday into the abyss when I covered my proactive short-side exposure.
Tough tape? Yeah it is, but there’s no shame in admitting it’s hard, there’s simply shame in pretending it’s not.
Minyan Andy: I think that last Wednesday was a game-changer. You walked into the S&P futures at 978 after bad overnight news and we finished up 70 points on the DJIA, a complete reversal after false rumors of a second stimulus package made the rounds. I, for one, don’t think Boo will miss his chance because there buyers on every dip. It’ll take several down days—if not a BIG down day of 4-5%--to actually scare folks.
Here’s my concise view: The market is not trading on fundamentals and, despite what people believe technical analysis means very little. This is a simple market with two primary factors: psychology—who in the world would be afraid to come in every morning and buy, or nibble on dips for that matter? Nobody. Who is afraid to short the market right now? Everyone.
This creates a severe supply/demand imbalance between retail/vanilla guys who want/need to buy the market every day and hedge funds/bears who are completely unwilling to sell or short this tape. Psychology dictates a severe supply/demand imbalance—the government did a great job creating this psychological dynamic a few months back.
I ask people—why are you buying? The answer I consistently get is “because the market goes up every day.” It’s the same thing we saw in 2000-2001 with Internet stocks.
Toddo: Yup, I see it—that was the point of my Monday column.
Minyan Andy: One last point I will make. Are you afraid to come in every single morning and buy the market without looking at ANY news or where futures are trading? I'm not and I would argue most people aren’t either.
Toddo: And it’ll work…until it doesn’t. As I offered earlier, I’ve seen similar movies before—some worked out quite nicely while others were a painful lesson. At the end of the day, the constant thread, the ultimate takeaway, is that discipline trumps conviction.
A Minyan recently asked me if I had any thoughts similar to the one I offered earlier this decade when I said “buy energy and metals, short tech and financials and move to Costa Rica for five years.”
The answer is yes, I do—I believe we’re deep in the throws of a “prolonged period of socioeconomic malaise entirely more depressing than a recession.” That’s not something I want to say; it’s something I have to say if I’m to stay true to my name and word and operate in a manner consistent with our foundational constructs of honesty, trust and respect.
I may be wrong—it certainly wouldn’t be the first time—and I can’t lay claim to how it will eventually manifest. My sense is that, scary as it sounds, our financial fate may no longer be in our hands.
What I will also say is this: No matter which way we sway—whether we walk down the road where painful debt destruction leads to an eventual globalization or the path where further credit creation leads to isolationism and protectionism—there are several silver linings.
The first is the fertile ground that awaits, which is different than the next best trade. The Age of Austerity has just begun and like most things, it’ll arrive in waves. When we speak of syncing time horizons and risk profiles, this is perhaps the most profound example. Financial staying power won’t just be a good idea; it’ll be professional salvation.
The second is us, our collective community, and how we respond to adversity. I believe in the human spirit and can say, through personal experience, that hardship and sacrifice define character that opens doors I never knew existed. As society is a sum of the parts, I truly believe that we, the people, will re-prioritize, reassess and refortify our resolve as long as we stick to our knitting and stay true to our passion and purpose.
It won’t be easy but anything worth having rarely is. And we will get through it.
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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