Weekend Ramblings

Ok, I know I said I wasn't gonna focus on the macro but given what's happened I'm going to talk about it in this post, get it off my chest and then that's gonna be it for a while regarding the macro. Given where I see the market headed, as I said last week, I think it's best I focus my attention on doing micro research going forward.

I look back at my posts in recent months and I recall how I was in "stock market purgatory". I respected both the bull and bear case equally. Although things looked pretty grim and I respected the "end game" scenario, I never fully embraced the bear case because of a few reasons. 1). Big bear markets of the past didn't begin with a crash unless it was the popping of a bubble and we did NOT have a bubble prior to the crash.....not even close with consumer sentiment still near historical lows, retail only moderately getting back in after massive outflows in the years prior and hearing commercials that say "in these challenging times" all of which suggests greed was absent 2) The doom and gloom in the summer was brick thick and main street dumb money - the best contrary indicator of  them all, was flashing LT bullish signals. Remember when I made mention in the summer how Jay Leno and the other talk show hosts were making jokes about the economy and how a few of my friends on facebook said "here comes the recession". That  told me not to fully embrace the bear case.....I respected it but I knew that if the bears would be right it would mean that dumbest of the dumb money as represented by Jay Leno and my friends would also be right and that indicated to me the door was left wide open for the bulls to somehow, someway still come out victorious. With the market now recovering just about all the losses from the summer (with the Nasdaq at new highs) and more importantly, doing so with bull market action, I'm in purgatory no longer. Bulls win bears lose. Case dismissed.

I ask myself should I have done better throughout all of this. I most certainly could have. Although I turned IT bearish in June and nicely sidestepped the  mini-bear market I didn't do nearly as good a  job getting back in. At the October lows I saw enough evidence of at least an IT rally and that warranted getting some exposure to the long side but I hesitated and failed to pull the trigger. I was overly cautious and too respectful of market action. I then started getting back in come December. There's a delicate balance you have to have in this game between discipline and conviction. Most people tend to have way too much of the latter and eventually go broke because of it. I tend to have too much of the former. I'm definitely working on correcting that.

Ok enough about past  and the shouldofs, wouldofs couldofs. What about now? I see 2009 all over again. The trading community is fighting this rally tooth and nail and instead of capitulating they remain stubborn, angry and bitter than ever. Remember back in 2009 I coined the phrase "troika of death" which then was FAZ, SRS, and SKF? Well now we have a new troika of death TVIX, SPXU and TZA. I'm quite convinced that the average retail trader not only missed this rally but lost money during it using some combination this trokia of death. I can tell by looking at the messages on the SPY message board on yahoo finance. This behavior is LT bullish.

The US economy seems to be picking up steam and the evidence is clear that there will be no double dip. Jobs gains were strong this month and with the 4 week moving average of unemployment claims well under 400K  hitting 3 year lows, we should see continued strong job creation. Last 2 month's figures were also revised higher and that's something you  tend to see early in a recovery, not when you're gonna roll over into a recession but I'm sure the permabears are going to find something to criticize about this job report. You know what? I've had it with these permabears. Even when I've been bullish I've read the commentaries of noted bears like Maudlin and Hussman to give me a balanced perspective but I find they do more damage than good. At times they helped cause me to second myself just enough for me to miss an opportunity. And have you actually looked at the a LT performance numbers or track record of these guys? Not good...not good at all. So why the fuck should I allow these jokers to poison my mind? When I turned IT bearish in June it wasn't because of the permabears telling me it was because the market was telling me, just like when it was telling me to be bullish recently. From now on, I'm going only use "the force" and my indicators. If you find that reading my blog is causing you to second guess yourself then you should stop reading it...don't worry I'll take no offense!

Ok back to the market. Now look, I realize that the market already had a huge move and it can't go up at this pace forever otherwise were gonna have 60%+ gain on the year which obviously ain't gonna happen. But these big, relentless rallies are what you see early in new bull market advances - they don't give you a chance to get in and they surprise both bear and bulls alike with their strength and with all the top picking going on, I'm thinking pullbacks should still be shallow....eventually we'll get a bigger one and perhaps that happens very soon but that too should be relativity mild compared to the action in the summer. Whatever the case may be, I'm not going to fixate on this ST minutia.  If I see a good long set up I'm gonna go for it but at this point I'm gonna be more selective. Chasing parabolic moves doesn't qualify as a good set up....I'm talking about stocks that are poised to play catch up on brink of breaking out from a consolidation. GDC.to is one stock I have which appears poised to do so.


At this point in time, I'm willing to commit 50% of my account to longs and keep in my mind, my longs are in the small/micro cap space which tends to have a lot of leverage. I will also be willing to put on a hedge if and when I see fit. When we do eventually get the correction, let's see how it plays out. If it's a true bull, we shouldn't see a big drop. Just how far can this market potentially go? A lot farther. There's still plenty of fuel in the tank. Last year the market made no progress despite reaching record earnings thus making it more attractively valued especially with how low bond yields still are. Retail has only been dribbling back in and there's a long way to go before they make up for all the outflows that have taken place over the past several months and years for that matter.  Despite the big move in stocks, LT bond yields have remained near rock bottom levels. Any move out of bonds into stocks can drive them up and there's a lot of gas in that tank. If you look at what happened prior to any major declines in the market in recent years you will notice that bonds were selling off for months and were oversold. We are still at massive overbought levels in bonds which tells you not only is upside potential still large but also that downside should be limited at this point.

As per the request of someone on planbeconomics.com I'll go over my stock selection approach as well as discuss my system of money management in my next post.