Mr. Market's Clues

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  • on January 7th, 2011

Last night on my drive home, I heard a popular fund manager call into CNBC Fast Money with his “shocking” bear case for equities.  I give Mr. Kass credit for sticking his neck out on occasion, and facing the wrath when things don’t work out as predicted.  What I don’t get is the need to predict.  He prides himself on holding a variant perception, yet the points laid out in his case for shorting are probably agreed upon, or at least acknowledged, by nearly everyone from Wall Street to Main Street.

He could be entirely right in his predictions, yet the market could go up.  Or he could be entirely wrong in his predictions, and the market could go up.  Or the market could go down with or without his predictions being right.  I see no reason to attach the “why” to the market’s outcome…that’s for historians to do after the fact.

So here’s my prediction…if the market is going to drop, it will do so when the compulsion to sell outweighs the compulsion to buy.  Nothing more, nothing less.  This may be accompanied by big bad events, or it may simply be that Main St drops(or refuses to accept) the baton for another leg to this nearly 2 year old bull.  Thinking like the composite operator rather than the Oracle of Delphi offers a far more timely way to ride the wave.

On to the market structure, I see more bullish than bearish data points but have my eye on a couple of recent developments.

What I Like:

1) News Reaction- good news gets bought, bad news gets bought…show me the opposite and we’ll talk about a correction.

2) Lack of Short Setups- finding a weakening stock without a major short interest has been like finding a needle in a haystack…a weakening market would at least tease me with some big name stocks under distribution.

3) Lack of Headline Day- Monday had the potential to squeeze the shorts and make believers of the USA Today crowd, but 95 points up on the DJIA might not do the trick. If excess supply doesn’t reveal itself in weakness, a plus 300 day would offer the alternative method of compelling big holders to sell stock to chasers.

What I Don’t Like:

1) Breadth– I find it odd that on this run to new highs we’ve failed to see even 70% of stocks above their 10 day average.  This is VERY disappointing, and is evidence of a narrowing market rather than broadening…and NOT due to the bond market weakness, as I measure this using names that trade actively and with decent range.

2) Junk, Junk, Junk– have you seen the crap that’s floating to the top?  I’ll give rare earths like $MCP a pass, as they’ve captured the imagination of many and offer few direct plays on what looks to be a real supply/demand issue.  But the ability of sub-$10 stocks to explode on new rare earth or smartphone “exposure” happens late in cycles, not early.

Notice that these are all market-based signals.  I’d add $USD strength/$GLD weakness to my list, but I’m honestly not sure where I fall on that yet.  It IS a new development, but does it reflect a strengthening economy or the end of the “Risk On” trade?  Someday soon we’ll know, maybe today…I’ll use $XLI as a secondary tell.  There will be plenty of time to act if it does matter, no need to assume either answer quite yet.

Give Mr. Kass credit where it is due…he made a timely ALL IN call days ahead of the March 09 low, and again called for a major low in July 2010.  In between, he’s made bearish calls based not on new information, but what could be seen as a need to be different.  This works far better on the bull side than the bear side, just as most sentiment indicators do.  He may be right again, but I’ll listen to Mr. Market for my guidance.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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