Tuesday, August 25, 2009
It's like living the real-life version of the Bill Murray movie, Groundhog Day.
It's the same thing every day: I wake up, and the stock market futures are higher. I look for reasons to turn bullish on the market, but all of the technical indicators are negative and the fundamental ratios stink. So I reiterate my negative view of the market and then spend the rest of the day pounding my head on the desk as stocks continue the Miracle Rally of 2009.
I've seen this movie a couple times before...
In 1999, Internet stocks blasted higher despite the lack of fundamental reasons. I yelled and kicked and screamed and argued with clients that it made no sense. It was going to end badly, and there was no way in the world I would put their capital at risk by buying into the technology sector. In fact, the best trades would be on the short side.
But every day was the same... wake up, clients beg me to buy, I refuse, stocks go higher, I bang my head on the desk.
That was a tough year. But 2000 was fabulous. Stocks began to reflect their true underlying values.
The same thing happened in October 1990. Investors were convinced the stock market would collapse when the United States finally retaliated against Iraq for invading Kuwait. Stocks were in freefall, and nearly all of my clients were begging me to sell stocks short.
But I couldn't do it. The fundamental ratios were cheap, and the technical conditions were improving. So I yelled and kicked and screamed that shorting stocks didn't make sense. In fact, I argued they should be buying as much stock as possible. The market was discounting the worst of all possible outcomes, and the odds favored a market rally as soon as we went to war.
Every day was the same... wake up, clients beg to get short stocks, I refuse, stocks go lower, I bang my head on the desk.
The final quarter of 1990 was also tough. But the market screamed higher as soon as the first American bombs started dropping.
Today is frightfully similar.
I'm bearish, and I've been wrong. Every day is the same. Everyone is yelling at me to get in, I refuse, stocks go higher, I bang my head on the desk.
Yet, I'm sticking to my bearish stance... kicking and screaming that stocks are going to move lower and arguing that short-side bets are the trades to make right now.
Time will tell if that works out.
What I remember most about the previous events, though, is the market never gave the other side an easy way out. If you were short stocks when the first Iraqi war broke out, then you were buried overnight. The S&P 500 gained 10% in one day and 30% in one month.
Short sellers lost a ton of money.
The same thing happened to owners of Internet stocks in 2000. When the bubble finally popped, there was no easy way out. Most investors took a bath as stocks went straight down. Many of Wall Street's darlings were worthless within a few months.
The problem is, most investors think Wall Street is like a game of musical chairs – where the objective is to stay in the game as long as possible. If you're the last one in the seat at the end of the game, then you win.
But they're actually playing a game of Russian Roulette. The objective is to get out early. You don't want to be the last one holding the gun.
Granted, I exited the game early. Despite calling for a bottom in stock prices in early March and predicting a massive rally, I thought the music was going to end a couple months ago. So I am suffering the ridicule of all the other kids still playing.
But just like every other irrational move on Wall Street, this rally is going to end abruptly. Investors are going to rush for the exits all at once, and no one is going to have an easy way out.
Yes, it stinks to be sitting on the sidelines while everyone else is laughing and playing and having a good time. But surviving and prospering in the stock market has nothing to do with who's having the most fun.
It has everything to do with avoiding the bullet.
Best regards and good trading,
Brazil continues to surge... the commodity-rich country's Bovespa index makes new 52-week high.
Starbucks keeps climbing... coffee shop rockets to 18-month highs.
Oil hits 10-month high... recovering economy drives crude near $75.