Never a dull moment

A few notable things to discuss. We saw Buffet make a big splash with his $5 Billion investment into BOA which is similar to when he make that investment in GS in October 2008. Buffet's motto is be greedy when others are fearful and fearful when others are greedy. He's clearly acting on this principle. Buffet's move in October 2008 didn't signal the final bottom but if you bought into the market at that time and held for at least 1 year you did quite well. This move by Buffet also reminds me of when he bought into Level 3 communications in early July of 2002. Again, this wasn't the bottom of the market but a year later the market was comfortably above July of 2002 and the year after that, well above.

So, should you follow Buffet's lead? Yes and no. As I said before, cherry picking some names into the panic was warranted because even though it's unlikely, there's the chance of a V bottom in the market or the stock you had your eye on.  There's also the chance that the stock you had your eye on will shown  great relative strength due to strong company specific fundamentals.  But as we saw the last few times with Buffet's bottom fishing expeditions, he tends to be a bit early and we know from the history of panics in the past that it takes several weeks of base building in the market before a sustainable rebound occurs. Then of course, there's the possibility of total disaster whereby Europe implodes  triggering another global financial crisis and/or the US goes into a recession. Such a turn of events would surely send the market to significant new lows.  Therefore, the appropriate course of action, in my opinion  is to have limited market exposure only with strong conviction stocks while keeping a high cash reserve while we wait for signs in determining how this will all play out.

Now, let's get back to the reccession debate. Notable bears Hussman and Mauldin have gone "all in" on their recession forecasts. Last summer they warned about a recession and were wrong but this time they are officially on record calling for one. Here's what I think. First of all, I think these bears are acting similar to what a gambler does when he "doubles down" on his next bet trying to make up for previous losing bets.  Not only were they wrong last summer, these guys were on the wrong side on the entire bull market skeptical the entire time and probably got embarrassed by that as well. No doubt their egos are brusied and so now, to make up for it, to get their revenge, they  are very eager in wanting to be early in calling the next recession. They do make some good arguements, I won't deny that, but here's the main problem I have with believing a reccession is comming....there were no excesses. Reccessions have always exposoed and cleansed away the greed and excess of the boom that preceeded it.  Where was the greed? In 2000 it was the tech sector, in 2007 it was housing. What about now? Did the economy overheat or overexpand in some way? Hardly. Can you say the average retail investor was greedy during this bull market? Hardly. Most people still believed we were still in recession during the entire bull market. There were some equity inflows but they were quite modest compared to the inflows of the previous bull cycle.

In my lowly opinion, I think there's a good chance these bears could be mistaking a recession for what could just end up being a downward blip in the slow growth/sluggish nature of an economy recovering from a housing led downturn.1990 was also a housing led reccession and it wasn't until the second half of the decade before the economy was running in full gear. The bust in 2008 was larger and so the sluggishness should be even more pronounced. Now of course, there's differences from 1990 and I respect the idea that this time could be final straw....that the government can no longer come to rescue of the economy because the damage is too severe, debts are too high, ect. The thing is though, the pessimists have been saying this every fucking time for the last 30 years and listening to them would leave you poor, envious and a miserable SOB. Oh sure, they had their moments of glory but they had far more moments of humiliation.

As far as the latest rebound goes, notice how it has pretty much done via gap up and go action. That's the signature of a dead cat bounce fueled by the unwinding of reckless bets made by  idiotic bears. As I mentioned on August 10th, bears were getting reckless with their ridiculous put buying and eventually they were going to pay for it and so now here we are. How long could it last? Tough to tell but the easy money has been made as the market is now ST overbought.

Even though there have been times where I felt strongly about the ST direction of the market I have avoided ST trading as a matter of discipline because my  simple buy and hold strategy was working so well. I was going by the "if it ain't broken don't fix it" principle. Plus, I know from experience that ST market moves are often too random to trade. However, once in a while I find that the market offers ST set ups that have high reward to risk ratios like when I noticed the reckless put buying  on strength a few weeks ago. I knew from experience that such an occurrance has always resulted in the bears eventually getting reamed.

I believe it's time for me to incorporate a more active trading strategy until the market can exhibit bull trend behavior because it may be a while before that happens. That doesn't mean I'll be trading every week...what it means is that I need to take advantage of those rare set ups which I know from experience, are high reward/low risk opportunities.  It's very, very important that when you miss out on an opportunity you don't go "on tilt" trying to make up for it. Chances are you will get involved in a mediocre or weak set up that ends up backfiring. This is a mistake I would often do in my younger days. Then what ends up happening is you lose confidence and are too gun shy to pull the trigger on the next good set up creating a vicious cycle. DO NOT revenge trade. If you missed out or fucked up, blow off some steam. Go for a walk, punch a wall...whatever and don't enter another trade until you are mentally normalized.

Back to the markets...as I said earlier, market action of late smacks of a dead cat bounce or bear market rally. These rallies can be quite sharp and powerful doing whatever it takes to shake out and punish weak and greedy bears. At this point in time from a ST trading perspective either the long or short side doesn't look appealing because the market is now ST overbought which favors bears but not IT overbought which favors the bulls (since a few days of sideways action could work off the ST overbought condition clearing the way for a move higher).

I wanted to also talk about the high level of insider buying. It's a positive no doubt but I wouldn't take any long term cues from it. I remember in August of 2007 the market sold off sharply and insider buying hit a 15 year high (similar to this August). It marked a ST low but nothing more.....we all know what happened in 2008. All insider do is buy weakness and sell into strength. In 2008 insiders got it wrong big time and then they sold heavily into strength in the summer of 2009 and that was hardly the end of the bull market.

I had originally planned to discuss gold but I will leave that for a future post otherwise I'll never end up finishing this post. Hope all is well with everyone.