The Cavalry Rides Again

 | Dec 19, 2011 | 6:34 AM EST
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We just keep thinking that someone will come to the rescue. We keep thinking that everything "bad" that is happening is actually already "in" the market. We keep talking about opportunities from the selling of premium assets by Credit Agricole or Paribas. We keep thinking it is business as usual and we can just go buy anything that's down.

What's so amazing is that there is no evidence that this hopeful attitude is worth anything at all, except in sporadic moments when we get a takeover -- Novellus (NVLS) -- or we get a report that confounds the shorts -- Federal Express (FDX) numbers being the best example last week.

In fact, the strategy that has worked so well is to use every one one of these cavalry whispers to blow out of anything economically sensitive and sell anything that needs accelerating world growth. Anything.

Hilariously, it is the exact opposite for gold, where every dip signifies the end and you have to sell it, short it, buy puts on it, and then bury it.

Sometimes it helps to visualize the moment with an individual stock. Let's choose Dow stock Alcoa (AA). Today the futures look up, and that means Alcoa will most likely open up and people will signal an all-clear for this company, which, while the trust owns it, we are reluctant to sell it down here yet I expect it to report a horrible quarter. People will ask, how much risk is there down here?

I think AA is going to have a horrible quarter. Miserable. I wish I could sell it, short it, and cover it in a nanosecond, but the trust doesn't really allow for that so we tell people it is going lower.

But today people will try to come up with a reason to own it. The only reason it is up is because it is part of the "cavalry" trade, the futures being up because someone "knows something."

At the same time, when traders believe the cavalry is going to come, they sell McDonald's (MCD) and General Mills (GIS) (which reports tomorrow).

What I am saying is that you should do the exact opposite of this. People don't think of this because they are too gripped with the agitprop of risk-on/risk-off.

But that's what is going to happen.

So, check it out. The cavalry trade rides again. And the market has no memory for what happens each time: The cavalry runs into a European bond auction, people realize that Alcoa may lose money -- the estimates are ridiculously high -- and we start the hopeless trade all over again.

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