Wednesday, January 01, 2014

New Year Thoughts

Its a time for some reflection at the start of a new year for investors and traders. I always try to think about what would the late great Marty Zweig say about the state of the market. I don't have Zweigs's sophisticated models or historical examples of what happened when or if the combination of these conditions existed, but I think I get the gist of the situation so here are some thoughts:

1 - Monetary Policy

The Fed is still on the bull's side, but slightly less so.  All the Fed pumping these past several years has been based upon a deflationary thesis in order to avoid the USA and world economies from becoming the equivalent of post 1989 Japan or the post 1937 USA. It appears that the Fed cautiously believes that their approach is working and that the economy can slowly begin to walk by itself as the Fed weans us off of QE. IMO, the gist of the Fed's policy is to view the economy and monetary policy like two weights on a see saw. The more the economy rises on one side of the see saw, the less QE weight will be used on the other side of the see saw. In theory this will go on until eventually monetary policy can get back in gear with historic long term money supply growth norms and non or slightly inflationary interest rate norms.

Score one for the bulls. Stimulus may not be as powerful as before, but it still is a bullish scenario. It certainly is nowhere near an Edson Gould "three steps and a stumble" moment or a Paul Volker pull back on the reigns and choke the horse tightening jolt. So every day we will listen to everyone, including the new open Fed itself,  talking about the Fed, short term rates, the yield curve and so on. There may be market shakeouts and scares, but until something happens to upset the applecart like the appearance of the Fed pushing on a string, we should be OK.

Furthermore, with our budget and national debt out of control, fiscal policy is still in spending disequilibrium in favor of the bulls. Maybe Paul Krugman's  who has a damn the torpedoes spend more approach or Larry Summers with his non deficit worry approach will disagree. But in my opinion, Krugman is on a pedestal way over his inflated liberal ego's ability. And, speaking of egos, Larry Summers makes more sense, but even his Laissez-faire budget approach is way out there.

2 - Investor Sentiment.

We all know that bullish investor sentiment is off the charts in sell territory. That also goes for the extended markets deviating from their long term moving averages by historic proportions. I'm certain that we can find loads of technical metrics all wrapped up into some indicator that is flashing a whopping sell signal.  Chalk off one for the bears.

3 - The Tape

After all these bull market years, the tape is still strong. But, I think there will be some re-alignment of asset allocations by the institutional investors as the 2014 begins. In addition, now that last quarter performance games are over, I think that some market leaders may be due for a visit to chateau bow wow. Perhaps this will result in sector sell offs and group rotation. In my view, tape momentum is ripe to turn on a dime. I will be watching things like new highs, opportunities to profit on individual stock breakouts, market leaders, McClellan oscillators, etc.

Summary

I think that this year things will not be as easy as last year, but in the end, monetary policy will win out. Plus, our government is in no position to do something fiscally significant. Nevertheless it does not matter what I think on a macro market basis unless something big happens to change the big picture stock market equation from bull to bear. Perhaps some exogenous big international crises will do the trick. The market is not historically overvalued, except for some individual stocks. Until then, I will go with the flow, taking what the market gives me, not fighting the tape.

So call me concerned about investor sentiment and whatever new year theatrics the tape throws at us, but in no way am I ready to make some big market turning call or make a change of posture. As always, I reserve the right to change my views on a dime. For me flexibility and defense is the name of the game.  My risk control comes by playing short term momentum, cutting my losses and being prepared to quickly reassess and change my posture if necessary. Asset allocation is not my game, but hedging may be done on a day or swing trading basis if I need to act fast to protect myself. For intermediate term holdings, I intend to play small and see how the cards are dealt out for now. Mostly bullish, short term trading and swing trading shall continue to reign as my preferred vehicle. I will let the tape and the number of opportunities determine how much money to invest.


BIG Capital Advisors LTD and Seaview Partners LLC are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.
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