Play Ball!

  • Posted by
  • on May 10th, 2014

“Sometimes you win, sometimes you lose, sometimes it rains.”  Crash Davis

Fridays are my son’s baseball practices. We need the field time, with last weekend’s scores looking more like a football score. The sky blackened 30 minutes before practice, with spots of heavy rain. A look at the forecast and radar showed this to be isolated and brief, but coach sent an email cancelling practice. Enjoying pizza nearby, we were a little annoyed and decided to go to the field anyway, affirmed by two other dads. When we arrived, the sky was clear, kids were on the field, and coach scrambled to send an email saying practice was back on.

So, we had only 6 kids but a killer practice. On the way home my warped mind, as always, drifted to markets. We’re witnessing a violent storm in a small group of stocks, seemingly out of nowhere but stemming from an unsustainable atmosphere. It’s being extrapolated into a 2000 or 2007 parallel, using the fun math(sample size=1) that says every 7 years in this century we crash after breadth weakens. And we’re now into a seasonally weak period in a mid-term election year…oh no! It’s likely not the end of opportunity; I’ve seen just as many breadth divergences resolve in the direction of the generals as the troops.

As a card-carrying member of the “divergence as warning” club, I’m also comfortable looking beyond them. I’m a firm believer in tracking market leadership to gauge risk appetite. And you know what, that appetite clearly changed in March. It no longer wanted sweet treats, but something a little more nutrition-dense. Stocks like $TWTR and $LNKD and $AMZN and $TSLA and $FEYE have been shredded, while REITs and consumer staples and Latin America and Europe have been bought. Different appetite, not an absent one.

Concerns about weakened “breadth” are a reason to be selective, just as concerns about profit margin reversion are a reason to use conservative forecasts. But there is no divine law mandating this wrong to be righted, and certainly no timeline on which to lean. It cannot be the sole input to our process, as its massive implications prevent any sort of objective judgment and flexibility. Personally, I act on shorter-term divergences; it’s the only way to sift through enough failures to be positioned for the ones that actually develop into longer-term successes.

Another practical approach is this…if you don’t like falling, expensive, popular stocks, don’t buy falling, expensive, popular stocks. Just don’t let them block you from buying rising, reasonably priced, boring ones. Or worse, head to the bunker with a “crash is coming” portfolio. A consistently applied risk management process is the perfect antidote; if this localized sickness spreads, as we are taken out of positions one by one and unable to find worthy replacements.

I’m not sure why pundits feel the need to warn the public; it’s beyond harmful as the advice lacks both context and a Plan B. Our coach had good motives and was premature(and wrong) to overweight that cloudburst; some kids were deprived of “gains” because of it. Had the storm continued, we’d have sat in our cars listening to the NFL Draft…no harm done. Just like markets, weather is fickle; sometimes it keeps raining, sometimes it stops, and sometimes there’s a rainbow. But how can you not at least be dressed and ready to take the field?

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.

blog comments powered by Disqus
Derek Hernquest Blog