"Did he doubt or did he try?
Answers aplenty in the bye and bye
Talk about your plenty, talk about your ills
One man gathers what another man spills"
-- The Grateful Dead, "St. Stephen"
I have often written that opinions are like butts. Everyone has one.
Vitriolic, partisan discourse in politics has been a low note these days.
Too often we debate markets with the same source of dogma and lack of objectivity that exists in our political debates.
I can almost tell how someone will interpret the markets (Bull or Bear or something in between) by the person who voices their views.
In general, views have become predictable despite the existence of so much uncertainty and possible outcomes, many of them adverse.
I find this predetermination odd. It takes many market forms, from Perma Bull to Perma Bear, from gold bugs to those who recoil at the suggestion of purchasing precious metals. In politics it is Liberal vs. Conservative, Democrat vs. Republican.
And something to avoid.
Many find my market view today somewhat perplexing, as for days I have been bullish short term and bearish intermediate term.
But I endeavor to remain objective and I am committed to looking at all considerations and factors (even charts) when I analyze what is increasingly an ever more complex investment mosaic.
I certainly have no concession of the investment truth.
Do You Want to Be Intellectually Right or Do You Want to Make Money?
To many, charts are the truth, and most technicians are bearish today based on the recent breakdowns. I get it. But in a world in which the dominant investor is passive and not active, in which products and strategies chase price momentum and exaggerate short-term prices, should we emphasize and give as much weighting to charts as compared to the past when, perhaps, price was more truthful?
In simple terms, I view the investment mosaic in the shape of a triangle in which the three interior angles add up to 180 degrees but are assigned different weightings. The upper angle is the one in which I give the greatest emphasis (fundamentals). The bottom left angle reflects investor sentiment (I weigh it substantially less than fundies). The third angle on the right of the triangle is the "X" factor. It usually doesn't come into play, but when it does it is to be reckoned with!
The fundamentals and valuation allow me to develop a calculus for the market's "fair market value." That calculus assigns probabilities to three to five core scenarios, from pessimistic to optimistic. From there I get a single point S&P value calculation, which in uncertain times is a range, like today.
That "X" factor is where it gets interesting. Sometimes, like now, it is bearish positioning or the behavioral response of buying all dips in a world of zero interest rates. Sometimes the "X" factor is one's gut and experience. Occasionally the market is an art project and not a science project.
But, other times that "X" factor is something new and unexpected (e.g., Covid-19 in February 2020).
2020 in a Nutshell
For several years I have written that we live in a society and amid markets that lack the predictability of the past. The world is interconnected more than ever before, transparency is heightened, and cooperation/coordination between the world's largest countries is at a low, while the dominant trading and investing entities worship at the altar of price momentum.
This means less "trending" and heightened volatility.
After experiencing all-time highs in early February we moved quickly lower by the third week of March as fears of Covid-19 spread and "stay at home" edicts proliferated.
Then the "mother of all short squeezes" speedily followed in one of the strongest "rip your face rallies" ever -- something I forecast in The Tina Ripper.
The final stage on the uptrend was a cocktail delivered by Dave Portnoy (@stoopresidente), Robinhood (and his band of merry men) with an assist from the other momentum boys, products and strategies. The cherry on top was Masa Son's SoftBank, who had far too many tequila shocks. It all ended with a speculative blow-off to the upside in a handful of heavily owned tech stocks (FAANG plus Microsoft (MSFT) .)
With buyers sated, reality quickly returned since the first week of September and bearish sentiment and defensive/negative positioning took front stage. RBG's passing threatened the passage of any stimulus bill and the Democratic Party's presidential nominee took a firm lead in the polls.
This violent up-and-down action happened in the space of only about eight months.
The S&P 500 Index closed at about 3300 on Friday, well above (13%) my calculus of fair market value of between 2800-3000.
The reality is that markets rarely trade at intrinsic value. Markets usually spend the most time being undervalued or overvalued. Indeed, in the last three years the S&P Index has traded under my fair market value" calculation on only two occasions (in the fourth quarter of 2018 and first quarter of 2020).
I remain bearish over the intermediate term for many of the reasons above and others, but over the short term I am gaming the market and counter punching (and net long of exposure) based on my view of defensive/negative positioning as well as other factors. Importantly, many of my concerns -- health, economic, profit, political and geopolitical -- have been absorbed, have been somewhat discounted and are now well-known. (Make no mistake about it, in all likelihood at some point in time these headwinds will reappear and dampen equities, again).
Sometimes fundamental analysis fails us, especially in a market so driven by products (e,g., ETFs) and strategies (e.g., risk parity) that worship at the altar of price momentum.
And sometimes charts, which typically show us where we have been but not where we are going, also fail us. As it is said, there are many good charts that lie at the bottom of the ocean. (I have written on multiple occasions how changing market structure has led to reduced chart credibility, dented the value of technical analysis and has led to the exaggeration of short-term market moves).
The market is a discounting mechanism. Looking at the rear-view mirror is not value-added when investing, nor is it awakening.
My gut feel is that if the market can avoid making lower lows -- which, based on late last week's performance and the increase in the S&P in Monday's action, is possible -- the pressure to buy and play "ketchup" could intensify as we move toward year-end and typical seasonal strength.
Importantly, my positioning is not cast in stone. I can and will likely turn in a nanosecond, and when I do you will be the first to know.
The only thing I feel relatively confident about is that I expect the heightened regime of volatility demonstrated over 2020 to continue into 2021, and that Mr. Market will do its best to screw up and confuse as many market participants as it possibly can.
"Saint Stephen with a rose, in and out of the garden he goes
Country garden in the wind and the rain
Wherever he goes the people all complain...
Fortune comes a crawlin', calliope woman, spinnin' that curious sense of your own
Can you answer, yes I can
But what would be the answer to the answer man?"
-- The Grateful Dead, "St. Stephen"
I never recommend stocks. Rather, the intent of my Daily Diary is to explain what, how and when I conduct my trades and investments.
It's your ball (and money). Gestate your ideas by doing your own research, which is complemented by rigorous analysts, strategists, technicians and other industry practitioners' analysis that you have learned to respect over time.
But I will freely give the following advice:
-- Read as much as possible.
-- Avoid self-confidence and dogma.
-- While sticking with your discipline, be flexible and stay open-minded.
-- Embrace opportunities.
-- Trade and invest unemotionally.
-- Consider all outcomes.
-- Expect the unexpected.
-- Always consult the contrary.
-- Do your own homework.
-- Recognize your time frame and risk appetite.
-- Consider probabilities, upside/downside -- not specific price points/targets.
And remember: One man gathers what another man spills.
(This commentary originally appeared on Real Money Pro on Sept. 28. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)