RANDOM THOUGHTS OF A PROLIFIC NATURE
- Considering emotion vs. process and execution. There are so many way to muddle up an otherwise simple equation to success not just in the markets but in life. Emotions will always be a part of our makeup. What we can do as progressive individuals is identify and isolate emotions for what they are. This will help in not allowing emotions to interfere with process and execution. In fact, it is imperative to process and execution that emotion remain as isolated as possible. Think about the times when process and execution take a backseat to emotion. The excuse always starts with "I don't feel like," which immediately tells you that emotions are hindering the process and execution that you know will create your success. This goes for anything you are motivated to do with a positive, beneficial outcome in mind. Outcomes that bear tremendous fruit never come without the sacrifice of isolating emotion while religiously following the creed of process and execution. Generally, individuals are never able to overcome emotions in order to allow process and execution to thrive. The very nature of process is repetitive, robotic and emotionless. The antithesis of human nature, which is filled with countless emotional dynamics. The ability to execute consistently also requires the ability to put aside emotional dynamics that are at the very essence of our being. - The pessimism that had come into the markets as demonstrated by the put/call study I posted last week is in the process of being relieved. Given the technical structure of the market at the end of last week, along with the quick return of pessimism, this current rally should not have come as a surprise to anyone. - There is a great deal of risk in the markets during May. The old adage "sell in May and go away," may prove true in 2013. I will be outlining this in greater detail over the next week or two. - The fact that the current rally is led by Consumer Staples, Utilities, Industrials and Healthcare smells of a rally that has global institutional asset allocation to the United States written all over it. When foreign institutions are in the initial phases of comfort with a particular investment theme, they appreciate familiarity, history and stability. The aforementioned sectors offer those attributes. This attitude of US assets being the least of all investment evils worldwide should continue to be recurring theme for the long-term. As comfort levels increase so will exposure to more aggressive names in technology, biotech etc. - The SOX is far and away the most bearish looking of all the indices I track. It...
THE NEED FOR SIMPLICITY THAT WALL STREET WILL NEVER EMBRACE
Within the context of a bull market that voraciously searches for reasons to tack on points to the upside, the default stance of an astute investor should be that of simplicity. Attempting to dissect and digest an abundance of information will do little to justify the persistence of such a market. It only serves to cloud the reasoning of an investor. It is true that often times investors suffer from paralysis through analysis. Information is good to a certain extent. Within the investment community there are very few that escape being information gluttons. It stands to reason then that it is best to keep analysis extraordinarily simple. The greater the extent of the bull, the more simple one must keep their analysis in order to avoid being paralyzed through thought. This market is at a point where the more elementary the analysis, the higher percentage your success rate will be. This phenomenon of simplicity being the modus operandi of true bull markets is the reason you see so many newcomers do extraordinarily well during extended bull runs. Their approach is extraordinarily simple, falling right in the sweet spot of analysis that creates the greatest profit during these types of runs. I am not speaking about longevity here. It is true that those who create extraordinary gains during true bull runs will end up falling flat over the long-term. I am not arguing that point. My sole concern is creating the proper mindset for investors to perform in the here and now. We'll deal with tomorrow...tomorrow. Let's look at two charts that exhibit simplicity to the Nth degree. Without giving much thought in terms of dissecting these price moves, simply look at the essence of what is happening. Allow your eyes to do the work without any "buts" or "ifs" involved. The first chart is the Nasdaq Composite, which was most recently reviewed in the weekly review on Sunday. Here is the outlook after today's move: Next we have the S&P 500, which is putting together picture perfect movement ABOVE its generational trajectory. This is as bullish an intermediate to long-term pattern as can be imagined: You know why Wall Street is filled with underperforming asset managers that have destroyed public perception of aptitude within the industry? The very pedigree that defines the modern day Wall Street employee is the biggest impediment to success. The pedigree that defines asset management in the 21st century is built on analysis to the point of exhaustion. If you are not analyzing a stock, commodity or economy on an hour by hour, minute by minute basis then you are not properly fulfilling your duties. Or so they are...
THE BRUTAL, COLD AND HONEST TRUTH ABOUT “INVESTMENT THESIS”
In considering a topic to dissect for my viewing audience on this night, I couldn't quite put a finger on anything of relevance to discuss. Perhaps I have writers block? Perhaps it is a symptom of a schedule that has been busier than usual lately, with various projects I am working on causing my mind to race in a multitude of directions? Perhaps I am following my own advice, instinctively choosing not to think about this market more than I should? Whatever the case may be, given my lack of performance in 2013 and the fact that the markets have become more difficult to predict due to the monotonous tone they have taken on, my tendency continues towards conservatism as opposed to anything overtly aggressive. I simply have no reason to come out swinging here. Whether from a technical perspective. Individual allocation perspective. Performance perspective. Everything is telling me to stay put. It can even be argued that my duty may fall towards cutting exposure. I am bullish on every single stock held in the portfolios today. It is a matter of to what extent I am willing to sacrifice gains in order to allow the bullish thesis on these individual holdings to take shape. The more ingrained the faith that comes with extensive research into a portfolio holding, the more an investor is willing to sacrifice short, intermediate and long-term gains for the sake of allowing the thesis to take shape. Is this a proper form of portfolio management or an irresponsible, reckless act? Much like any other aspect of this business, the line between proper and irresponsible is razor thin. Crossing that line is often indeterminable, only visible in hindsight much past the point of no return. What has occurred over the past decade is that the market has become extremely efficient in putting the will of an investor to the test through often brutal demonstrations of relentless punishment. There is no more "I will think about this for a few weeks or months and then decide what to do." If you are behind the curve ball when the market is throwing its pitch, your chances of catching up are virtually nonexistent. The willingness to sacrifice gains for the sake of "the thesis" then must be looked at with increasing suspicion. The brutal, cold and honest truth is that these gains you are sacrificing as an investor simply have not come easily over the past 5 or 10 years. The cost of producing these gains with any consistency is extremely high in terms of willingness to maintain consistent exposure, constantly staring in the face of the next macro,...
IS AN APRIL MARKET TOP AT ALL POSSIBLE?
There are a variety of market theories and philosophies that I have discussed over the past 26 months on this website. One of the aspects of market behavior I have discussed briefly in the past is the fact that the market will not ring a bell for investors at important tops. In other words, market tops are devoid of fundamental information that will allow investors to rationally or logically assess that a pullback is forthcoming. It is only after many months or sometimes years, that investors realize the deterioration that was taking place beneath the seemingly bullish picture that was being painted. Very few are aware to the point of being able to realize that the tickets they are buying are not worth the paper they are printed on. In 2013, there has been a consistent pattern of anticipation of the end to this rally. During January, the perceived excuse was uncertainty in the earnings picture. During February, we had a convincing seasonal pattern that pointed to an impending top, along with various technical confirmations. The ides of March have now come and gone without much of a hiccup in the persistent buying. Now we are coming up on April, which is earnings report season for most U.S. companies. If you are looking for a top in April, then there are two obvious fundamental scenarios that drive your conclusion: 1. Earnings will come in worse than expected, causing market participants to realize that they have driven equity prices too far forward OR 2. Earnings will be inline or better than expected, with the reaction being to sell on the news Scenario #1 is as brilliant and far reaching a bell sounding for investors as can be. Earnings come in surprisingly weak, allowing investors to have a logical set of fundamental data from which they can make seemingly logical decisions to cash in at record high prices. I don't see Big Bird walking around because this isn't Sesame Street. 1+1 does not equal 2 here. It equals 5 and sometimes 48. Just depends. To assume that the market is going to give investors a logical set of data for which to make simple assessments to sell is to assume that the pricing mechanism within the markets is friendly in nature. Scenario #2 has to be given a bit more credibility than the first. The only problem I have with this scenario is that participants remain obsessed with finding a top to this rally. A sell on the news scenario, while being a crude means of exercising unexpected mental anguish upon investors 15 years ago, is an outdated and obvious form of...
SOME NOTES FROM A MARKET UNDESERVING OF THOUGHT
It may seem somewhat contradictory in nature than I am putting together a series of notes about a market that I consider undeserving of thought. What I intend to convey by labeling this as a market undeserving of thought is that in bull markets thinking has a tendency to do more harm than good. On a day to day basis it is becoming increasingly clear that market professionals especially have become prone to discounting this bull market, preferring to prepare for its demise rather than benefit from its prowess. I have been guilty of it. A vast majority of the pundits I read have been guilty, as well. It is indeed the market professional or experienced investor that tends to under-perform in markets of this nature, while those who perform less in the way of critical analysis tend to outperform. The reasons why should be obvious. One very simple word: Thought. The necessity to critically analyze is the hallmark of the market professional. When critical analysis is absent from the routine of the market professional he or she feels as if the job they have dedicated their professional life to isn't adequately being done. That feeling of inadequacy results in a continuous cycle of analysis. The problem is that analysis within strong market trends, be they bearish or bullish, inevitably will lead to premature decision making that counters the prevailing trend. Countering the prevailing trend leads to a loss of capital. A loss of capital leads to questioning and refining the analysis, when in reality what is in question is the foundational aspect of whether any analysis is necessary at all. So without further ado, allow me to present pieces of analysis that are completely counter to the prevailing trend: - The Nasdaq Composite is caught in between some key trajectory points. Very obvious congestion area. How it handles this point will be extremely important to the short to intermediate term bull trend. - The selloff in the Dow Transports is of some concern. I will have an updated chart this weekend. However, both the volume and nature of decline are short term negatives for the market. Transports, alongside financials have been the leaders of this bull run. Important that they continue smiling. - A question I keep asking myself is at what point does the weakness in Emerging Markets become a concern? Or are we at a point where Developed Markets are now seen as prudent with Emerging Markets much less so? - The Russell 2000 is pausing right on its generational trajectory. Here is a look at that trajectory from a chart I posted last month. -...
CYPRUS HILL
Leave it to the Cypriots. Futures are down roughly 15 on the S&P, as another Mediterranean country proves to the world that the only positive attribute they bring to the table is a healthy diet. I won't get into the macro details of what is occurring as that is not my forte. However, I will postulate a bit about my plans for reacting to a sudden move in the markets during the week ahead. I have maintained a 75% (25% cash) invested stance due squarely to my under-performance over the past 1.5 months. I don't necessarily like adding volatility when performance is lacking. It has been my experience that being conservative in the face of a lack of performance is a much more prudent stance than anything born out of aggression brought about by the zeal to play catch up. A gap down tomorrow is not an invitation to act in any capacity. It is squarely an invitation to observe closely as different averages run across support after the substantial run to begin 2013. There will be those who insist on buying the open in hopes that a blip down will remain just that...a blip. There are those who will react to the events, taking down exposure or possibly getting short, with the thought that this marks an intermediate term top. These are all hopeful gestures of analysis that take the form of buys and sells in the marketplace. I can't think of a time in nearly 20 years of playing this game that I haven't looked back on a macro inspired gap and wished I would have reacted FASTER. It has nearly always been the case that observing would have paid better dividends than simply reacting. I have nothing to do tomorrow but to observe. Just another Cyprus Hill...
THERE IS NOTHING TO SEE HERE, CARRY ON
As I sit here to ponder the ongoing conundrum that is the financial markets over a cup of tea, with Bun B delivering his rousing collaboration with Jeezy that they aptly named "Just Like That" playing in the background, I am torn by the continuing bifurcation between the markets and the portfolio of names I have assembled. Typically when greeted with under-performance, such as the case in this particular situation, there are a number of simple alternatives to remedy the issue. In this case, however, I am hard pressed to discover a means of delivering a return via any vehicle that is able to deliver reasonable risk/reward over the intermediate to long-term. My question then becomes: How many other guardians of capital are facing the same dilemma as I am? According to the statistics that are being cluster-bombed into whatever accommodating portions of the mind remain, the average, above average and even mediocre market professional is fully allocated to this market currently. That is a very important distinction if you subscribe to the same core fundamental concept as I do when it comes to the market. That concept simply states that wherever the most opportunity for pain exists, the market will exploit that point. Therefore, if allocation is to the point of being full across a broad spectrum of market professionals, the knife wielding sociopath that is the stock market will turn maniacal, with Wall Street eventually being covered in testes from multiple affluent regions throughout the modern world. A United Colors of Benetton testicular circus for the ages, if you will. It becomes a difficult proposition then. I have two distinct sets of circumstances causing me angst: 1. Risk/reward for new positions that is well below any conceivable comfort level that I am willing to accept 2. A belief in the markets being the ultimate henchman that won't allow me to act with confidence when everybody else is With those factors playing against me, whether or not they are reality based is not important. The fact that I am entertaining them means that there is not a move I can make outside of where I am currently that can be done with any confidence. To attempt to play catch up here because I am under-performing a benchmark that has been on a literal tear has a negative expected value, therefore. So I sit with a 75% invested portfolio in names that really haven't been doing a whole lot outside of SPNS. As I said, there is nothing to see here, carry...
A NEW PROBLEM FOR AAPL: IT IS NOW OFFICIALLY A “CATCH UP” INVESTMENT
Be forewarned: The message that I deliver is generally mundane in nature. I bring no delusion of sudden wealth being created in the equity markets as I have found that when the words sudden and wealth are combined, the word catastrophe is not too far behind. The only way to become wealthy in the markets is through a steady regime of controlling risk. Everything else you are being sold is poppycock that deserves no place other than stuck to the bottom of your penny loafers. There is a grand delusion among a majority of participants on Wall Street that buying into under-performing names during spectacular bull runs similar to what we are experiencing currently is an organic means of diffusing risk. The catch up trade in popular, under-performing names has been a favorite among both amateur and professional investors since the first ticker tape began stringing along the emotions of money hungry young men. Much like cutting profits short, adding to losers or following group think over the proverbial cliff, the catch up trade is a ticket to miserable existence on Wall Street. In the here and now, we are in the middle of an extremely powerful rally that has caught both professional and retail investor flat footed. There are those who are desperate for an opportunity to catch up but are afraid of the risk of buying into the momentum driven leaders of the current rally. Human nature, being as it is, loves the feeling of a bargain when all else seems to be selling for a premium. It doesn't hurt when that bargain just so happens to be one of the most widely held, popular, cult-driven investment names of the past decade. AAPL is going to act as a gravitational moron beam over the next few months attracting the type of capital that is toxic in nature. It will be capital that has either A) missed out on this rally and is now looking for a seemingly low risk proposition to catch up OR B) capital that continues to be infatuated with the story, prestige and fundamental ratios that have been cited for the past 250 points down. In other words, the dumb money. Furthermore, AAPL has another problem that acts as an impediment to its future appreciation. By missing out on one of the most spectacular rallies to grace the pocketbooks of Wall Street participants over the past six months, it has inextricably placed itself in a position of great difficulty. Odds are that by the time AAPL is granted the footing to put together any type of sustainable bottom, the markets will not be as...
CONSIDERATIONS
Some considerations: 1. I've had May come up as being an important turning point for the markets since Q3-Q4 of last year. I had a strong inclination that it would be a low based on the behavior of the market. It is becoming apparent that this assessment is incorrect. Perhaps May will bring about the elusive top? If so, this rally will have gone much further than most everyone expected. 2. The purpose of trajectory points is to gauge the behavior of the market around historically significant areas of resistance/support. A break of most relevant trajectory points, including generational trajectory points on the S&P and Dow, is in theory bullish. The Dow has now shattered all of its trajectory points. The only hope for the bears is that the S&P 500 doesn't begin running away from its trajectory, similar to the Dow. By the looks of this past week in the markets, the running away process for the S&P 500 has kicked off. 3. How little attention the markets pay to anything except the impetus to advance cannot be ignored. No form of analysis exceeds in a market of this nature, except to buy and hold. Those who have been afflicted by thought the past couple of months have found themselves heavily allocated towards cash or net short. The markets have no obligation to make sense. 4. Financials continue to lead in an organized manner that looks to have continuation in mind. 5. AAPL will be an under-performing asset well into 2014. There will be no respite for the weary. 6. The divergence between equities and commodities still rubs me the wrong way. Perhaps we are entering a period of strong USD/strong equity correlation that will render commodities helpless? 7. All of these considerations have no weighting whatsoever on my actions in the markets. I am comfortably allocated at roughly 75% long and 25% cash. When the proper set of circumstances present themselves, the cash will be put to work. Perhaps during the second half of this month. Perhaps during the second half of this year. I am in no particular hurry. Some considerations I am making on a Sunday morning in a market that probably deserves less thought that most are giving...
THE LITTLE BOOK OF WHAT NOT TO DO WHEN BEHIND
2013 has taken on a rigid frown with relation to the managed portfolios. While the S&P 500 is up nearly 9%, the portfolios are essentially flat this year. Not necessarily surprised by this lack of performance given the fact that small-cap names that I choose to participate in often times create their gains in sudden, dramatic fashion, followed by months of relatively meaningless, sideways action. It is part and parcel of investing in companies with market caps below $500 million. However, this tendency toward under-performance has certainly put a damper on my ability to push forward with new ideas. Allow me to explain: There are a couple new investment ideas I have been researching during 2013. One is a retail name and the other a regional bank. Both have the obligatory minimal risk equation as a result of restructuring within the company and apparent stability in price over an extended period of time. Both also have the equally important upside potential in excess of 3 to 4 times current price. What these names don't have is the blessing of a portfolio that is prepared to take on more risk. There are various layers of risk management that are deployed across the portfolios I manage. One of these layers is a simple rule that disallows any increase in net exposure during periods of drawdown. I don't ever want to be in a position where risk is increased as a direct result of wanting to catch up in performance. A devious phenomenon begins taking shape within the mind when pressured by exclusion from the markets as a result of under-performance. It is amplified further when the markets have essentially been lubricated to the point where anyone who places a dollar into the machine is assured of walking away with some form of profit. The pressure of being left out of the party creates a response that is driven on one side by greed and on the other side by fear. The greed reflex sees the amount of capital being created, counting that capital essentially as a loss within the overall portfolio. Every dollar that is missed with every tick higher in the Dow creates a response that moves the participant closer to the investment hell that is chasing performance. Judgment becomes clouded. The barrier to entry for new positions becomes less and less. The opinions of those around you, whether social media related or otherwise, begin resonating with increased intensity. The impetus to act on greed becomes overwhelming in nature. The fear reflex is an even greater obstacle. You see, it is fear that kept the participant out of the market to...