Mr. Market's Amnesia

 | Feb 26, 2013 | 12:00 PM EST  | Comments
  • Comment
  • Print Print
  • Print

This commentary originally appeared at 7:44 a.m. EST on Feb. 26 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.

Yesterday there was a late-afternoon stream of questions in the comments section that got me to thinking and ultimately writing this morning's opening missive.

There is no permanent truth in the financial markets, and I promise that what I describe in his column will change and a trending market will ultimately reassert itself.

But, for now, we are likely back to a market without memory from day to day.

It is a market that is likely positioned to value and reward trading (sardines), not investing (or eating sardines).

Monday's price action is symptomatic of the challenges, volatility and opportunities of an unsettled market backdrop that is induced by the only certainty -- that there will be lack of certainty. It is not the time to turn your back for too long on Mr. Market. Nor is it time, unfortunately, to rely heavily on fundamentals and technicals and to invest, as Wharton's Dr. Jeremy Siegel would suggest, for the long term.

On the technical side, I can say with confidence that the unique volatility will, to some degree, upend our abilities to read and interpret the charts (which only tell us where stock prices have been, not where they are going). For now, even my beloved fundamentals will also take a back seat to uncertainty -- political, economic and otherwise (e.g., Italy), some of which is outside our control -- and the dominance of Washington policy in determining share prices. The latter has had a salutary impact on equities but has obscured natural price discovery in stocks and bonds for some time.

It is time for those who are facile to become emotionless in the trading process. It is the time to buy red and sell green, to buy the dips and sell the rips.

But it is also a time to err on the side of conservatism in our trading as the backdrop becomes more of a random walk than ever.

It is a setting within which, stated simply (and being truthful), we don't control our own destiny.

Again, the market lacks predictability or trend.

If your time frame is a few months, my advice is to stay flexible and opportunistic. If you are trading, trade small.

If your time frame is a few years, my advice is to buy weakness. Even then, keep your investment positions smaller than usual.

It is especially important to be emotionless, balanced and opportunistic in the market that has no memory from day to day.

There are numerous talking heads that seem so glib and talk/advise with absolute certainty -- I won't name names; you know them as they are often making appearances in the business media or are literally in the clouds of the investment blogosphere -- but the certainty they project is preposterous and dishonest, as the only thing to be certain of is a lack of certainty.

In the final analysis, they are mostly affixed in perma-bullish or perma-bearish dogma, and they are unwilling to admit to the randomness of Mr. Market; they are not being truthful to themselves or to you.

But, as mentioned previously, the lack of predictability does hold some opportunity but only if one is open-minded, opportunistic and willing to embrace volatility. During times like this, we need to learn, at times, to leave our collective investment brain at the door and utilize good common sense combined with a lot of nerve to trade this market, learning and being willing to catch falling knifes and short abrupt moves higher.

It also means, during short periods of times, being constructively positioned when one is intellectually bearish and being short when one is inclined to be bullish of investment mind and keeping the shelf life of our holdings very short in an unpredictable and volatile backdrop.

I continue to lean bearish, but, as described above, I am willing to be more trading-oriented and less investing-oriented in a market without memory from day to day.

Columnist Conversations

Ford is working on its third straight gain following two days of steep loses to start this week. At this...
Market is holding on for gains for now but think Doug Kass is right and could see some decent profit taking by...
I have a full blown article surrounding the U.S. Retail Sector coming out on soon, but for now let's just lo...
The dividend action is pretty quiet at the moment, but I wanted to point out for those generating income with ...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.