Half time report

I can't believe 2011 is already half over...where does the time go? Overall the market has acted pretty much in line with how I've been expecting it to this year. If not for this latest flurry this week, the market would have closed the first six months around flat YTD. Now, we all know the supposed reasons for the market's volatility since May and some of them are valid ones, but let's take a step back and look at the long term chart. Coming into the year we had a massive move from September and the market got quite overbought on several measures and even despite this, the market still climbed a bit more before finally stalling out. That's not unusual for a bull market but history shows that sooner or later such a strong move is followed by a drawn out consolidation phase and so it doesn't matter what the excuses are. A sprinter can't run at 100 miles/hr forever....sooner or later he's going to stop out of exhaustion but it doesn't necessarily mean that the sprinter can't run anymore...it could very well be that he just needs a break.

Although I expected to see a consolidation phase I didn't dare try to profit from it because I knew the timing would be tricky and man was it ever. Top pickers got steam rolled again and again this year. Until recently I maintained all of my core long positions which were almost entirely in energy services names. They did quite well for me this year largely outperforming the market. I have now scaled back these holdings overall by 50%. My sale of esn.to looks a bit hasty right now as the stock has popped 10% since I sold out. Isc.vn which I reduced, has climbed a few cents more from where I sold. But despite this, I've been having a decent year so far. I realize though that the half time score means nothing...only the score at the end of the game matters.

Mr. Market must have read my previous bearishly slanted post and decided to teach me a lesson because since then the market has taken a hefty dose of viagra and got one hell of a boner. An anonymous poster
may have been trying to rub it in too in the comment section. Hey, it won't be first time I get it wrong but in my defense, my bearish rant pertained to the IT as in 2-6 months not 2-6 days. The market was certainty oversold enough to warrant a bounce, but if you look at how this bounce has been playing out, it's been done almost exclusively via morning strength which to me is the hallmark of short squeeze/dead cat bounce behavior within a downtrend similar to what we saw last summer. Look back to the 2004 consolidation. The first move down in the market during that time was about 6% from the peak, then there was a snap back rally that recovered about 80% of that drop. Ultimately the market headed down again and dropped 10% from the high. I'm not saying I expect to see every wiggle to play out the same as it did in 2004, I'm just saying that in consolidation phases, it's normal to see volatility like this to make it tricky for the bears to capitalize and it's seldom a straight line down to the final destination. When the market dropped in March due to Japan I said that I didn't think this was the beginning of the "real correction". I feel the same about this latest rally....I don't think it's the beginning of the "real rally" that powers the market out of this corrective phase.

I think we need to see a bit of a "reset" here to fill up the bullish gas tank. We need to see oil back in the 80's, the VIX above 30 and the 10 year sub 3%. Near the recent lows in the market we were getting there but didn't make it. Now we already have oil back to $95, the VIX at 16 and the 10 year back to 3.2%. Now, I know I need to be careful not to be dogmatic about my thinking like the permabears out there who insist that they are right and that the market has to do what they tell it to do (and then get run over big time as the market doesn't listen to them). There's no law that says the market has to do what I want it to before it makes substantial new highs which is why I am going to pay close attention to market action. The market tends to act a certain way when it's in bull mode or corrective/bear mode. As I alluded to earlier, upside action in corrective/bear mode tends to be done via morning strength...not always but often.... whereas in bull mode the market tends to start off timid and then finishes strongly...again not always but often.

So, right now I'm sitting here with a hefty amount of cash like I did last summer. I suspect I'm going to be pretty much a spectator for while. I'm still holding some longs but I would be inclined to lighten up further on strength. I get very tempted to play ST trades when I'm in such a situation out of boredom or the desire to do something with the cash. This is a no- no. A lot of traders/investors out there feel they have to make a certain amount of gains every week/month. When you try to "force" the market like this it will usually backfire on you. Last summer I had the World Cup and the birth of my daughter to distract me. This time around I have no such distraction...perhaps I'll take up gardening. What I have been doing is scanning the smallcap/microcap universe for new candidates to add to my portfolio. I've some up with a few interesting plays so far...when I'm done I'll post them.

I've had a sweet ride since September and so if it turns out I was too hasty scaling back my long exposure to over 2/3 cash then so be it. If I still felt I had the wind at my back I would have continued to hang in there but I just don't feel that way anymore and so I can't be a strong holder nor do I want to end up a pig that gets slaughtered....I was sitting on some hefty gains. I also don't want to stay bearish/neutral too long either because it feels mighty crowded in that room. Perhaps Mr. Market will punish me for my lack of courage to stay long....it won't be the first time that's for sure.