WHAT THE LAW OF AVOIDANCE IS SAYING ABOUT THE MARKET RIGHT NOW
I have the portfolio's I manage up to nearly 100% invested between 8 different positions. I have made two of the positions public GSIG and PSTR. The remainder of the positions within the portfolio all have market caps under $100 million and are spread across industries as diverse as oil and gas to a restaurant play. All of them are distressed/restructuring plays.
I added GSIG as a way of putting excess capital to work in a company that I am confident will outperform the general markets during any upward advance. I felt coming into this year that past January the general markets would get choppy at best and fall dramatically at worst. The worst case scenario was only going to be temporary in nature. However, that worst case has not come to pass and I don't think it will as we approach the middle of the year.
There are simple philosophies in trading that can assist any market observer to better gauge the financial markets. One such philosophy, exercise, theory or whatever other name you would like to give it is what I like to call the law of avoidance.
The law of avoidance is simple: If you have a worst case scenario laid out for a particular stock or the general market and it does not come to pass, then that stock or the market as a whole is stronger than indicated.
For example: Let us say that we own a company that has reported terrible earnings. A miss on the top and bottom line estimates. Future guidance stinks. Pessimism reigns in the time span between the report and the stock opening for trading the next day. You are expecting the stock to sink at least 10% on the open.
Lo and behold the stock opens down 3% and simply hovers around that area for the first hour of trading. By the end of the day it closes flat. This is the law of avoidance. The stock has avoided the worst case scenario. In doing so, it has exhibited behavior that would indicate that the price action in the company is a lot stronger than you think.
It doesn't matter why. It's not supposed to make sense. Don't allow you brain combined with a good deal of arrogance to get in the way of listening to what the market has to say. In the case of the example listed above the stock avoided the worst case scenario, exhibiting behavior that indicated strength. That's all the information you need.
The law of avoidance came into play over the past few months with the performance of the general market. My normal scenario for this market had it pulling back between 5 to 10 percent by mid-year. As of today we are about 2.5% off of the intra-day high posted for the S&P in May. Never mind the fact that we weren't even supposed to be making a new high on the S&P until the second half of the year.
The law of avoidance for the S&P saw the average avoid its worst case scenario with ease. A sign of strength. The S&P made a new high during a time period where it was supposed to be consolidating. Another sign that there is a consistent underlying bid to the market. This is the market speaking. All that needs to be done is an opening of one's ears.
I want to be 100% invested here. I don't use leverage so that's as much as I'll get up to. The sideways correction phase will come to an end sooner rather than later and I expect the upside to be substantial. Position yourselves accordingly.
