The past few months have been a blur of research intersecting with a suspicious eye towards a market that has been as a difficult to predict as any I can remember in 20 years of investing. There is something to said for human inclination towards the expectation for a reversion. The pendulum that is proportionality is constantly moving in both directions so that we cannot become comfortable with a state of emotions for too long before another state takes over. It is only natural then that we would expect another state to take over the market.
This market, however, has proven that it is perfectly fine holding the pendulum of proportional behavior firmly planted to one side. That, of course, being the bullish side, which has shown little interest in abating in recent months. It is often best during times of perplexing price behavior to simply allow the market the freedom to do as it wishes without opinion, as difficult as that might be. Opinion is most easily suspended when you focus on other things. In my case, it has been research.
I have become obsessed with a couple special situations recently. This has given way to research that has taken me down roads that I find both entertaining and challenging, at the same time. I've literally spent more time reading over prior bankruptcy cases, court documents, dockets and opinions over the past few months than I probably have over the five years prior. It becomes financial detective work when you have a stake in the outcome that is determined by forming the proper hypothesis, backed by taking the correct amount of risk given the particulars of the situation.
Luckily for me, this exercise in financial detective work comes at a time when the market doesn't warrant excessive thought or effort. It's uninteresting in its opportunities, as they are generally being offered with a significant amount of risk. It is taxing in its one-sided persistence, which comes during a seasonally treacherous period for the markets. My focus on the micro instead of the macro is warranted, in other words.
When I did my end of the day run through the charts, I noticed the following:
- The SOX is in no man's land. No read there.
- The financials (XLF) found resistance right at the trajectory from the 2009 low. There hasn't been a real "thrust" downward, however. Neutral reading here.
- The Nasdaq has also found resistance at an important trajectory, as discussed in last week's notes. The average could whip around this month a bit more. The more volatile the whip, the more relevant the top. Remember that.
- The S&P just lost its trajectory today. Although it did so in a very uninspiring way. This likely leads to more sideways whip.
Chalk it up anyway you wish. My opinion remains that this is a market undeserving of conviction. The ability to be agile in your allocation will be a valuable asset through the end of October. Keep points of risk in momentum names tight. Keep an open mind. And focus on factors that have the potential to create profitability that has no choice but to supersede any short to intermediate term pullback.
