Wednesday, June 15, 2011

Take a Walk, Mow the Lawn

All the rain stopped me from cutting the grass since last weekend and the lawn was looking total white trash so I had to do it tonight. All in all, it was probably helpful.

Take a Walk, Mow the Lawn
Going back to last week, this 6 trading day interval has been confusing and full of mixed signals. After yesterday's big oversold bounce, today was another reversal of all that movement. Hard to know if things are coming or going.

Inflection points are difficult times, sometimes you will want to embrace a new trend that may not actually become real. Other times you will not want to give up on a prior trend no matter what you see happening. Examples are the ultra bearish market shorters that never let off the gas after March 2009. I doubt they made it to 2010. Before that, the "it's well contained, buy at a bargain" crew probably bought and lost all the way down in the financial meltdown. It happens. It is human nature.

I have laid out my belief that we are in store for more pain to the downside as a downtrend has started. I think this because of many factors I have written about. This would be a new trend, and it may not shape up. Indices could hit the 200 moving day averages, pause, and start back up again. I understand and planned for that risk. Times of change operate by their own rules, and this is a key point.

Hot money flows have levitated stocks for some time. Psychology is a major factor in this. One of the better macro sites out there is Macro Story and author Tony has allowed me to reprint this graph he had up today:
Margin Debt At Multi Year Highs

Click for larger view.

I have talked about margin debt before. What is important to notice here is how long the margin debt (red line) has been above the correlated SPX prices. It has not resided above the SPX for this long going back to 1997. You can see the green circles showing highs in the relationship. Why is this important? Remember this graph via Pragmatic Capitalism I had up that shows how bearish sentiment has been?:

Click for larger view.

I asked for reader thoughts because I knew from market action and anecdotal evidence that nowhere near the level of bearishness indicated by this chart existed in the real world. I wanted to call it a false data set. Maybe people were saying they bearish looking 6 months out, but they were not betting money that way. The margin debt confirms this unless most of it was silver shorting on margin.

I bring this up because the AAII sentiment survey may not be applicable as a contrarian play. A collapse in margin debt (this drop is going to hurt people's accounts) would be better I think. If it is not, what other gauges may not be as sharp as past times?

In any case, I would advise taking a walk or mowing the lawn if you are in this market. There is no reason to try and peg a bottom here. If things stabilize and then start back up, you can pass on that first 5% move and focus on the 10% after. If we are really setting up for a move down, it's harder to make money in a downtrending market without going short, which I don't really like to do. Yes, I know I am short now via SH and PSQ, but it's first time in a while. Down markets tend to be very volatile and that makes cashing in harder as well. Just my two cents.

Have a good night.


getyourselfconnected said...

Bruins win the title! Wow, I thought they were done in the Montreal series. Good stuff.

David Batista said...

Congrats on the win. As a New Yorker, you know how hard that is for me to say.

But hey, it's hockey. So I don't feel too bad. :)

And, uh . . . is it bad I've never mown a lawn before? These are the things that scare me from buying a house. I simply have no first-hand experience with "housely" chores.

Shingo said...

It's amazing how can you make such graphical presentation.

Jennifer Hillier said...

Congrats on the Bruins win! Vancouver has officially embarrassed me. Canadians are usually so much more classy than that. :(