The recent market action has put some salt in my game. Not because I am some hardcore bull that can't see outside of my own market thesis. And it's not because of the fact that putting together a profit in January has become a difficult exercise. Rather, it has to do with the ramifications of a negative January for the market as a whole.
You should know first that I'm not attached to any single piece of analysis that I put out there. I am convinced of my analysis to the point where I am willing to take on large positions for long periods of time. But I am not attached. There is a difference.
Attachment creates judgement flaws that are emotional in nature.
Conviction creates judgement flaws that are intellectual in nature.
Intellectual judgement flaws that come with conviction can be corrected through new sets of data. Emotional judgement flaws that come with attachment cannot because the data cannot be separated correctly due to its emotional nature. It becomes a cloudy mess. With that said, I can change my mind and often will on a dime when new sets of data become apparent. Bringing me to this January's market action.
January rallies following a strong year of gains are like the egg white and the yolk. They just work well together. One does not exist without the other. Therefore, when I crack the egg open and see that the all I have are the egg whites, I begin to worry that the whole carton of eggs may be wrong. That is what has happened here in January. Something that was supposed to happen, with every conceivable type of wind at its back to insure that it would happen, simply didn't. Not there. Absent.
That absence is a cause for worry. I will present the statistical data to back this up in my monthly summary next week. In the research I have done so far, however, into the ramifications of a negative January following a strong year, it has led me to believe that 2014 could be more volatile, frustrating and potentially negative than most are prepared to deal with.
We are certainly not on track for a 2000 type bear market or worse yet, a 2008 type bear market. Not by any stretch will things get to that level of pessimistic disregard for equities. However, we could very well glide within a range of flat to down 10 percent for most of the year. Nobody predicted that type of outcome for 2014. It now needs to be on the radar of every trader and investor, as the probability of it occurring has increased dramatically.
A sideways market with a negative bias will appeal to stock pickers. The rising tide will disappear, however. With the subsiding rising tide comes truth in the market. Real names, with real situational edges, within industries that are resilient enough to withstand a 3,6 or 12 month cycle of growing pessimism will create the gains.
My plan of action began unfolding Friday when I moved down to 80% invested, with a 20% cash position. That can move down further if the market chooses to prove what I have set forth here. I will stay as far away as possible from highly-correlated, index dependent small cap names. I want off the run names. The current portfolio of WMIH, CIDM and BFCF is a good start. Should be more added to that mix as the market allows.
Conviction, not attachment.
