A few days back, I found myself to be very aggravated by the time 4pm rolled around. Why? Because the markets were completely headline driven, and the headlines seemed baseless. Europe will have a comprehensive plan by the 23rd, no they won't, well maybe next week... now definitely we'll have a lot of details laid out by next Wednesday... It's maddening. Trying to figure out what's next in Europe and trading on it with anything less than superior access to information is a loser's game. You will probably see a lot of stop orders getting filled, only to watch the market return to the levels you initiated your trade. As I reflected, I saw I was annoyed because I was trying to formulate opinions about something that for all we know, the European leaders might not have even fully explored.
So perhaps its best not to trade at all. If it is a headline risk guessing game, then trading simply becomes blackjack (assuming you can't count cards). Of course never happy with this as a theoretical answer (though it might well be practically prudent), I started thinking of whether one could play the market from one side or another while accepting his inability to front-run headline risks. Today, I saw Thomas Lee, Chief JP Morgan equity strategist on TV making his usual bull case. When the S&P was around 1275, he had said that 1250 (the previous low) would hold and stay as the lows for the year. I like that he was out there with an opinion, but I kept in mind that he was a bull 12% + higher. But then he started talking about just how much money is sidelined, and that with stocks trading historically cheap, the eventual return of capital to the markets would push us higher. I don't know if it was his reasoning or those glasses Lee wears, but I found it compelling.
Another bull case being tossed around is that earnings in American stocks are cheap enough to buy even if Europe does a poor job of resolving its issues. So do the math, and tell me how x% decline in European economies wouldn't impact earnings of U.S. companies enough to justify multiples. The problem I have with this case is that it doesn't take into account what would happen if banks had a liquidity crisis. If the French banks have to take massive markdowns on their assets and become insolvent, the question becomes whether or not the system would freeze up. From there, the question is how well and swiftly could European policy makers respond? What we have seen thus far from Eurozone policymakers does not exactly bring me comfort in envisioning such a scenario. But like Art Cashin says, betting on the end of the world only works once.
From a strategy perspective, I think it is important to remove oneself from the madness. Rather than listening to every headline, why not observe that the market seems to rebound on rather meager promises. "Give us another week, and it'll be great", and the market rallies. If you believe that this is an indication of just how desperate investors are, then steer clear. If however you think (as I do) that what the market really wants is to see is some unity among policymakers, then maybe our bullish friend Thomas Lee is right. After all, it seems those Euro policy makers seem to know what to say to find a little support for the market. I still think there is downside potential, but for the longer term investor (and this is admittedly a cop out because "the long term investor" can remain in denial about being wrong for the longest) it might make sense to look at starting to average in to long positions. I really don't see the rush because an upside move is still more likely to be methodical than a down move. Still, I think investors fearing the end of the world might want to think about returning to the market soon.
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