April 20, 2016

Anticipatory trading vs Reactive trading

My negative market view is diametrically opposed to the positive market action that we've been seeing lately. But as most readers know, I'm both a fundamentally based investor and anticipatory rather than reactive.

Of course, I recognize the potential short-term risks and liabilities to such an approach -- something my Real Money Pro colleague James "Rev Shark" DePorre (a reactive investor) often writes about. I also fully respect different fundamental and technical approaches, such as Rev Shark's disciplined message and strategy.  

That said, I'd like to respectfully comment on Rev's opening column from this morning, which reads in part:
"Market players often try too hard to gain an edge. They slice, dice and dissect the action and come up with reasons why this or that is about to happen. It is understandable, since in most endeavors clever thinking and brilliant insight tend to produce positive results.
In the stock market, it often pays to not think too hard. Sometimes, the obvious is the best course of action. It can be as simple as respecting the fact that the market has positive momentum.
Action like we had yesterday, when we broke out of a trading range and traded steadily higher, seems to attract large crowds of market players that want to find reasons to fight the action. They roll out the macro arguments about oil, currencies, central bankers, slow economic growth and so on. None of those things mattered lately, but they provide a very convenient basis for those who want to question the action ...
The funny thing about the market is that the smartest people can think themselves out of trades. Instead of just doing what is obvious, they try too hard to be clever and end up quite frustrated, as the market continues to act in an obstinate and unthinking manner.
Right now, the technical pattern of the market is painfully obvious. We have been basing for a couple of weeks and broke out to the upside. ...
Don't be afraid of the obvious. The bulls have the edge after the action of the last couple of weeks. There may be some further consolidation and even pullbacks, but the trend is obvious. The bears will be out in full force, talking about earnings, the slow economy, the central bankers, the bounce in the dollar and a variety of other negatives. But sometimes momentum is just momentum."  - James "Rev Shark" DePorre, 
Now it's true that sometimes a cigar is just a cigar, as Freud once famously said. But as I expressed it my opening missive today (as well as throughout the past year), I believe the current rally isn't a bull market. Rather, I think it's just part of a topping-out process that began last spring. And as was the case with stocks' four previous rallies of off their lows, I believe the market's latest move higher is destined to ultimately fail.

Indeed, I and others see many similarities between Spring 2016 and Autumn 2007 in terms of the accumulation of debt. That's one of the reasons why I've concluded that stocks' risk-vs.-reward ratio is particularly unfavorable now. It's also why I'm acting in an anticipatory manner and averaging up in my short sales.

For now the bulls seem to be having themselves a good victory cigar. But from my perch, their stogies look close to burning out.

via www.thestreet.com/story/13531601/1/blackstone-gso-and-ishares-iboxx-doug-kass-views.html