RISK ASSESSMENT WEDNESDAY
On October 12th I moved to a 100% cash position after liquidating the longs I purchased on October 4th.
I moved to cash because of the following realization that I spoke about in the blog posting from October 12th:
"Bottomline: The best case scenario for the markets over the next 5-7 trading days is a sideways trading range that consolidates between 1190 and 1230. The worst case scenario for the markets over the next 5-7 trading days is a move down to 1150."
Since that time the high on the S&P 500 has been 1233 and the low has been 1190. It has worked perfectly into the range that I expected. Today was the 5th trading day since moving into cash. Being that the markets are working out their overbought condition right near the highs of the range you have to assume a very bullish scenario going forward.
For that reason and out of respect for my research, I bought back into the position in FAS and EDC that I liquidated on October 12th. Unfortunately, I had to pay a premium for them over what I sold them at and my timing in initiating the positions today was off. FAS was initiated at 12.90 in the pre-market. EDC was initiated at 17.35 in the first couple hours of trading. Both closed lower than where I bought them. I wasn't expecting to nail the bottom tick. I'll sleep off my disappointment tonight...don't worry.
That leaves me with a roughly 50% invested position. The breakdown is as follows:
30% ZSL
10% FAS
10% EDC
It has become apparent that many investors are now requesting a wax with the brain washing that they have received at the hands of the market and the manic-depressive spin cycle of information that drives their actions.
A continued move up in the markets is not only possible, but in fact highly likely. The list of factors that can drive the market to S&P 1300 by late-November are numerous:
1. Seasonality - Allow me to indulge your appetite with the following facts
- S&P 500 during the 4th quarter has averaged a 2.4% gain since 1928. The past 20 years the gain has
been 4.6%. The gains during the 4th quarter are twice as strong as the next closest quarter.
- When the market has fallen by more than 10% during the 3rd quarter, a rally in the 4th quarter has not
failed since 1957. The last seven instances were:
September of 1974
September of 1975
September of 1981
September of 1990
September of 1998
September of 2001
September of 2002
- The 4th quarter following a double digit percentage decline during the 3rd quarter averaged a gain of 9.7% since
1974 and 5.5% since 1928.
2. Psychology - I continue to see a pervasive fear that is gripping investors the likes of which I have never seen. Despite the rally of the massive rally of the past couple weeks people are hanging onto the bear side of the equation as if it is the last condom in a Brazilian whorehouse during Mardi Gras. I said on Twitter today that your eyes can't see what your mind refuses to believe. There is mass refusal to believe in any bullish outcome regardless of the obvious facts that are presented. Instead, investors are choosing to bite into economic events that were factored into the market way back in September. Per the usual, the focus is on the wrong set of data at the wrong time.
3. Price Action - I hate using technical terms. I'm not going to discuss stochastics or head and shoulders patterns or breakouts. It's a lot more simple than that. Those fancy names are all derivatives of price action. Here's the bottomline with what has occurred in the markets over the past few months:
The bears had every single chance to take the markets 20,000 leagues below the sea. In no particular order here are the various opportunities the bears have had in the form of event driven catalysts to take the market down since August:
CDS spreads blew out.
Debt downgrades galore.
Recession fears.
Increase in joblessness.
Rioting in the streets.
An entire continent of countries that have formed a union but deep down inside secretly want one another to vaporize because of centuries long hatred of each others culinary choices almost fell apart.
China slowing down.
Morgan Stanley rumored to be collapsing.
Banks in trouble again.
The Republican debates.
Obama speaking.
The list literally goes on and on.
Despite this whirlwind of potentially cataclysmic events, the S&P is down a little over 6% since the end of July when the bear party kicked off. And the Nasdaq 100? It's down 2%. Just a few percentage points off of a 10 year high. Bear market? Really?
I'm a fan of keeping things as simple as possible. I take whatever information I get and dumb it down by a factor of 10. With that in mind, I have been saying since September that as long as people are willing to pay $5 for a soy vanilla latte from Starbucks we are nowhere near a recession. On September 18th, I wrote on article entitled "How Starbucks Tells Us That the Bond Market is a Liar", which made the case that as long as Starbucks is trading near all-time highs we are nowhere near a recession. I continue to believe that to be true. Starbucks closed at an all-time high yesterday.
See you at 1300.
