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Random Thoughts: Investors Are Bulled Up, but Will It Last?


Drilling into social mood versus stock market optimism.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

The stock market is the world's largest thermometer; perhaps that's why international investors are the most bullish they've been in 3.5 years, with close to two-thirds planning to raise their equity holdings during the next six months, according to Bloomberg.

Stands to reason, right? The S&P (INDEXSP:.INX) is up 120% since the March 2009 nadir, which is two months shy of four years ago. Credit acts great, if you can get it, and those invested in the stock market-slightly more than half of the US population, according to the latest statistics that measure such things-saw fear morph into upside greed despite The Devolution of Social Mood.

The stock market is a leading indicator of the economy; this we have studied and learned. The trickier discussion is one of socioeconomics vs. socionomics, or whether economic activity affects social processes or quite the opposite, if social mood shapes risk appetites and macroeconomic behavior. This debate traces back a long way: Did the stock market crash of '29 cause The Great Depression, or was it the other way around (as I believe)?

The tricky aspect to this discussion, as alluded to above, is the artificial stimuli that have been introduced to the System Formerly Known as Free-Market Capitalism. The bulls will argue it doesn't matter-that price is the ultimate arbiter of variant financial views-while the bears, who respect the action, remain of the view that the imbalances, cumulative still, have simply transferred from one reality to another.

Last week, I wrote a column titled 12 Cognitive Biases That Endanger Investors, and I will admit to falling prey to a few of those through the years (we are always learning in this business). Thus, the question is posed: Does credit continue to signal an all-clear for equities, or is the very fact that most folks are bullish (as the VIX (^VIX) drips toward 15-year support) warrant a more cautious stance, particularly given we're in the heat of the meat of earnings season?

I plan to trade surgically with defined risk as opportunities arise. That's not a cop-out (I used this strategy last year and it was one of my better years of performance), it's simply a reality that works for me given what I see, feel, and am comfortable going home with. There will be hits and misses along the way, but swinging for the fences, while sexy, most certainly leads to more strikeouts.

And as always, our first vibes will always be shared in real-time on the Buzz & Banter.

Random Thoughts:
  • I was about to unplug for the long weekend on Friday-and see some young kids; it's good for the soul-when I saw this article: Most Fed Officials Saw Economy Weathering Sub-Prime Crisis.
  • No, no, no, I'm not going to pull out a timely 2007 article from Minyanville that warned of sub-prime contagion-Land Shark!-OK, I did, but it's not about that, as my bonus daughter Mug likes to say. It's just that we continue to entrust the safe-keeping of our economic engine to this institution.
  • Big Ben waxed poetically in August 2007 (the time-stamp on the above link), "The odds are that the market will stabilize." He was wrong; he is not God, which is entirely different than having a God Syndrome.
  • As markets now appear stabilized-at five-year highs, nonetheless-I will remind you that we can always learn a lot just by watching.
  • Quiet as she blows, so to speak as the VIX drips to a 12 reading. I mean, it's so quiet you can almost hear a bonus drop-oh, wait! Sigh...
  • Check the 15-year chart below; while Sammy can slither sideways for years (been there), I spy long-term support at 10. Higher vols, for the newbies in the hood, typically arrive with lower prices. Just saying!
  • Apple (NASDAQ:AAPL) got pulled to the $500 strike Friday afternoon, as discussed in real-time on the Buzz. The forward price action will be shaped by positioning into earnings, which arrive tomorrow after the close. Be wary of "fat vols," which inflate premiums on options into events.
  • Research In Motion (NASDAQ:RIMM) continues to continue higher. That's 180% in a matter of months, for those who climbed aboard the BB10 Express.
  • Expiration influences tend to manifest (through an uptick in volatility) the days prior to expiration; on expiration, the action usually bookends the bells. And of course, today we'll have a belated hangover as dealers square their extraneous risk.
  • Mother Morgan (NYSE:MS) and Grandma Goldman (NYSE:GS) stood out on the upside last Friday, but we should keep an eye peeled for an insider sales window in Goldman, which should open this week. See it, even if you decide to ignore it!
  • On a housekeeping note, I have been focused on numerous things in this young year and haven't touched my book much (I've made some money on situations) and lost some money on my S&P out-of-the-money Feb. paper hedge, so no great shakes either way). As discussed above, I plan to shift my attention back to the tape this week as I see (perceived) advantageous risk-reward.
  • Good luck Ravens, and have a great day!

Disclosure: Minyanville has a commercial relationship with RIM.

Twitter: @todd_harrison

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Position in spx, commercial relationship with RIM.
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