The Long Cash Squeeze Market

Just a few random market thoughts here to end the week….If you’ve ever been involved in a short squeeze you know how the market can go against you and at times force you out of your position.  The idea that you’re borrowing money to short something places a very finite time period on your trade.  You can’t short forever because the potential loss on the trade is, well, everything (plus the borrowing cost!).  So shorting is a very different psychological game than being long the market.

But there’s a similar emotion that I am seeing and hearing a lot of – the long cash squeeze.  That is the feeling of being long cash that you want to deploy as the market rises.  So you wait for the market to correct, but it never does.  All the while you’re losing purchasing power and the opportunity cost of having bought in at lower prices.  In other words, you’re feeling squeezed in cash.  And when enough people are all convinced of this position then they start feeding into the cycle.  A slow grind turns into a steady grind and everyone who is waiting for the market to correct uses increasingly tiny “corrections” to buy in.  And those who don’t buy in end up buying higher and higher as they throw in the towel on their long cash position.

This can last as long as this mentality lasts and from the clients and managers I talk to this mentality is more firmly entrenched than I can ever remember it.  There’s a sense of calmness around such an environment, but it has the potential to become highly destabilizing at some point.  And if Ben Bernanke has it his way that instability till occur on the upside.   Of course we all know how that one plays out over the course of the business cycle.

Have a good weekend.