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Todd Harrison: On Pimco, Stocks, and History Repeating


Reading the signs as we find our way.

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

Signs, signs, everywhere there's signs.

There was a seismic shift in California, one that rocked the globe: Mohamed El-Erian resigned from Pimco.

The digital sphere is atwitter with speculation about what went down at the $2 trillion behemoth; Matt Klein wrote a good piece highlighting some of the speculation making the rounds.

I don't profess to know particulars; what I can say is that 1) insiders -- those close -- were surprised, 2) Mo is in the catbird seat (widely respected as a professional and a person) and 3) Mr. Gross is none too pleased.

Michael Sedacca touched on the hedge fund pile-on in play, so there may also be some market implications as funds chase each other's perceptions.

I'm reminded of Jeff Saut's missive on Monday when he wrote, "Over the next three to five years, we are going to elect smarter policymakers and therefore get smarter policies."

It's yet to be determined whether Mo will surface at the Fed or in politics, but for and with my money, he would benefit both.

Market Matters

The Nasdaq-100 (INDEXNASDAQ:NDX) breakout is in motion and tech bulls will lean against NDX 3600 support, if that's their thing. The old school isn't there yet -- that level is S&P (INDEXSP:.INX) 1850 -- and technicians want to see confirmation (via both indices breaking out) in a perfect world.

These breakouts are potentially good news, through a technical lens. The less thrilling news for bulls is that their camp is crowded. This morning's weekly Investor's Intelligence advisor sentiment finds 57.6% bulls and a scant 15.1% bears, and we have a VXO (INDEXCBOE:VXO) hovering near 11.

As discussed in the past and shared below, VXO 10 is decades-long support, and while one could argue that "vols" can be depressed for years (I lived it between 2003 and 2006), we should note that volatility, by definition, is the opposite of liquidity, and the Federal Reserve is in the process of draining (or tapering) liquidity.

Put a water pistol to my head and I'll tell ya that the tape breaks out to the upside but ultimately fails, and perhaps fails badly. That, and $2.50 will get you on the subway; so the smartest approach, in my view, is to manage risk while keeping an eye out for longer-term opportunities, which are getting harder to find but are there, or will emerge.

If we take our journey one stair-step at a time, the odds of stumbling are reduced in kind, and that is how I am trying to navigate the tape. And yes, there will be a time when "selling rallies" rather than "buying dips" will be the most profitable stylistic approach. As it stands, those technical toggles remain S&P 1850 and NDX 3600, so stay on your toes.

Seems Like Old Times

This is an actual conversation that I recently overheard while at dinner; it occurred between (what I presume is) a husband and wife:

"Let's just buy some; if it goes up, we'll win and if it goes down, we'll buy more (before it goes up again). We can't lose!"

Having been in this business 23 years, I've heard this before. I turned to my wife and said, "Those are the discussions you hear after a five-year, 177% run in the stock market; those are the conversations you reflect upon years later and say, 'we should have known.'"

Random Thoughts:
  • We've touched on the 12 Cognitive Biases That Endanger Investors before; it's likely worth a review, regardless of whether or not the tape breaks out to the upside.
  • If a journalist opines on a stock, he or she "doesn't have skin in the game." If an investor does the same, he is "talking his position." Sorta sums up the social mood, in my view.
  • Fleck had a heckuva feel at the 2009 stock bottom, rotating his focus toward the metals. Bloomberg is reporting that he is warming up to the short side in tech again, highlighting downside risk in Rocket Fuel Inc. (NASDAQ:FUEL) and Voxeljet AG (NYSE:VJET).

Twitter: @todd_harrison

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