Summer doldrums

I don't like what I'm seeing here. Friday's bounce not withstanding, we've had a market that has been sliding relentlessly in drip, drop fashion (bear market action) and the disturbing thing about it is that, overall, the key sentiment indicators have remained stubbornly too bullish. The Rydex ratio, which I have been noting for weeks is still too complacent and  became even more complacent as these traders have bought the recent dip. I don't recall a time where these guys have been proven right doing that (although they can be right for a while). The Rydex ratio is now at a level that is outright bearish- it's as low as it was near previous major tops in the past few years.  I know I shouldn't be obsessed about just one indicator especially if most others are giving opposite signals but they aren't. NAAIM barely budged from last weeks reading of 63% net long. AAII sentiment didn't change much either, although it's at neutral. Meanwhile the VIX only got as high at 18 and change during the lows of the sell-off. The only thing that showed wall of worry behavior was the put/call ratio which was a bit on the high side. Overall though, the ST sentiment indicators showed complacency since the market peaked early in the month. I read an article from Hulbert that said insider selling has ramped to dangerous levels as well recently.

I haven't felt this negative about the market's ST/IT prospects since June of last year. I don't know if we'll get the same degree of weakness that followed then, but I'm reasonably sure there will be something significant and I expect to see June's lows retested or broken. We can certaintly bounce a bit more for the next week or 2 but the bottom line is that I think there's unfinished business to the downside. If we get ST overbought again, I intend to make a play on the downside.

I've been heavily in cash (60%) as a defensive measure for a while now, but I'm becoming uncomfortable with this strategy. Given the negative ST/IT conditions I see, it's no longer good enough for me to be in cash like this. Although I will be in good position to capitalize on opportunities should the market have a significant decline, I'd most likely see losses in my core positions in the interim. I need to do better than that. I want to actually thrive if we get a drop and that means getting net short which is why I'm hoping there is some sort of a snap back rally in the next week or so.

Having said all this, there are some things that are potentially encouraging longer term. We are seeing more rate cuts across the board now with Emerging Markets countries with South Korea cutting too. If these rate cuts continue, it will put the global markets in a condition of loose monetary policy which historically has coincided with strong LT returns for equities. However, we need to see more easing and it takes time for monetary policy to gain traction. There also probably needs to be a fiscal push as well. In in interim, we can't be complacent about the weakness we are seeing overseas in China and Europe which now may be starting to  impact the earnings of North American Companies, in particular, tech companies.

It's been a rather frustrating year for me so far. I'm up for the year but only about 5%.  My largest holding hwo.to has pulled back quite a bit while I have taken a beating in fmc.to but my holding in the latter is quite small. I have given my "starter" position in fmc.to as much "wiggle" room as I'm going to give it and I'm now considering pulling the plug on it. Mind you, the stock could go to 0 and I wouldn't be hurt all that bad but as a matter of discipline I have to pull the plug at some point when I'm wrong and I have been. Oh sure, it could turn around the moment I sell but you can't think like that. You have to draw a line at some point. My fate largely depends on hwo.to right now which I'm a strong holder of and can be given my large cash position and my avg cost in the stock. The pull back it has had looks to be profit taking after a big run (along with some general market weakness of course) as opposed to a deterioration in the company's fundamentals. If anything, the fundies are getting even better after my email exchange with the CEO (yes I realize the potential  for bias).

Since 2009 I have been using a buy and hold approach with illiquid small/micro caps like hwo.to. which I believed were undervalued, had explosive potential but were overlooked. I have done quite well dong this but it hasn't been a bed of roses. I tend to have periods where I see solid gains for a 1-3 week periods, followed by nothingness or marginal to moderate drawdowns for several weeks. Dealing with the latter can at times be excruciating but you have to go through it because if you try to get too cute trading in and out you run the high risk of missing the explosive gains when the come. You simply need to have the conviction to stick with your position assuming that you have good reasons to have such conviction. You have the fight the impulse to make hasty trades as you watch the day to day fluctuations.

In the past, when IT general market conditions became too concerning I reduced or eliminated my long holdings and remained largely in cash. I've done it this year and in the summers of 2010 and 2011. I would have done better though  if had hedged my positions instead using index shorts (puts on index ETFs is my preferred choice). I would have done even better still if I took a tactical trading approach with the broad market capturing the ST rallies and declines when it's in "correction mode", although I admit that a lot of times the moves in the market during such times were too random and gap happy to do so intelligently. The bottom line is that I should have done more....I need to do more. I need to get out my 1 trick pony routine especially when macro conditions make a turn for the worse because I know my existing strategy won't work nearly well as buying and holding is only successful in bull markets.

There are signs that macro conditions have indeed turned for the worse but the same could have been said this time last year and the year before and they turned out only to be soft patches. We can't blindly assume that's gonna be the case again though. As usual I will defer to the facts and the indicators.