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CAN’T SHORT THIS MARKET YET

I was very skeptical of the market heading into 2009 and remained in cash throughout the nightmarish months of January and February before turning bullish on March 8th, the day before we bottomed.   I moved to cash before the market crashed in October (very lucky call I admit) and I allocated capital to the long side on the day of the November 21 “bottom”.   My indicators and risk management discipline have spared me from substantial pain over the prior two years.  Why do I point this out?  I am not tooting my own horn.  After all, if I underperformed the market after the millions of hours I have spent doing investment research it would clearly be time to move on to another profession.  I point this out because performance is the only thing that matters in the investment world.  You can be the smartest person in the world, but if you don’t have the 6th sense to be able to outperform the most complex dynamic system on Earth then you should just write books, teach and stick to TV interviews.  You shouldn’t read this blog if I underperform the S&P 500 year in and year out.  It’s as simple as that.  Contrary to what many people think performance matters.  It’s all that matters.

If the people you read and learn from don’t outperform the S&P 500 consistently you shouldn’t ever listen to them.  This is the only business where someone can bat .200 consistently and keep their job.  Hell, this is the only business where you can drop a nuke on the team headquarters and still sign a million dollar contract next year (see John Meriweather for more on this).  Why is this?  Because most investors and institutions don’t understand performance and risk adjusted returns.  Most people just look at returns and say “hmmm, this guy does pretty well.”  What most people don’t calculate is how the manager achieved those returns.  Did he just leverage up on high beta names?  Apparently that is what 80% of the hedge fund industry did for the last 10 years, but most of them were praised as geniuses.  I can run to Vegas with your money and come back with two times as much the following day.  You might think I am a genius until I tell you I bet it all on black.  The way you achieve returns is incredibly important.  I can’t stress how important it is to learn about risk adjusted returns.  If you don’t understand this complex topic you shouldn’t be investing in the stock market.

Now that I got that rant out of the way….This market appears too strong to short right now.  I am still entirely cash in my medium-term strategies and view the risks in this market as extraordinarily high, however, I do not feel comfortable getting short.  Breadth is till too strong, sentiment is still high (though not extreme), the market is rising on high volume and falling on low volume and is showing some real resilience despite bad news.   The market sold off into the uptick rule so the catalyst never really materialized this week.  I’ll re-evaluate my position when I do my update for next week.  As of now, I still think the risk/reward favors high cash levels, but shorting this market is still not looking like a great bet.  We’re being dealt off suit Jack and 5 time after time and that’s a hand you just have to keep tossing away.  After all, the market can stay irrational longer than you can stay solvent.   I’ll wait until the risk/reward is more favorable.  Even if it means waiting for months….I prefer to be the lion in the grass rather than the mouse by the trap.

More over the weekend….

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