The DJIA is hitting multi-year highs…y…
The DJIA is hitting multi-year highs…yes, despite all the bears out there explaining why the markets can’t go up any more, the markets just keep climbing. Remember when we talked about how we should set ourselves up into earnings season (see below for example) and I wrote
“But even in the shorter-term, as we head into earnings, I think the sentiment and perhaps the charts and the fundamentals are all set up for another move to the upside.”
We’ve had a pretty big move to the upside since then as we’ve gone through earnings season. I’ve added to my common stock positions across the board lately. But it’s been a big run and while I do expect we can and will go into a new stock market bubble led by App and Cloud stocks, I’m not going to be in a rush to build up positions further today at least. More in a bit. Here’s a flashback to what I wrote a few weeks ago about why we were going to be so long and bullish into earnings season:
Let’s update our trading stance and talk about how we’re positioning our portfolios in the grander scheme of the markets.
Over the last 12 years, I’ve written some two million words about investing, trading and the economy. I’ve literally received hundreds of thousands of emails, messages, comments and even formal hand-written letters from investors and traders and casual market observers.
One time back when I was a hedge fund manager, I decided it wasn’t worth it. I was sick of all the ad hominem attacks, the weird conspiracy theories, and desperate arguments I’d constantly get. When I told one of my biggest investors that I was going to quit writing and just trade, he told me, in no uncertain terms, that he’d pull his money out of my fund the day I’d stop writing.
“Wouldn’t you want me to focus exclusively on trading?” I asked.
He pointed to all of the insights into other people’s thinking that I got from that communication flow. He said that my ability over time to gauge when the crowds start leaning too far one way or another from the emotions flowing into my in-box was a huge competitive advantage — and one of the reasons he was investing a chunk of his money with me.
And to this day, I continue to get a constant inflow of emotions via what comes through my in-box, my phone and my mailbox. Here’s a sample of what the hedge fund managers and traders that I talk to are saying, literally cut and pasted from emails from traders in my in-box:
“Why aren’t we 100% short?” Why should we own anything?”
“Since the market’s low, as measured against trailing-12-month sales, equity capitalizations have increased as a percent of sales from 75% to 140%. And by my own calculation, stocks have risen from 13x-14x to 16x-16.5x normalized earnings. Nevertheless, bulls, such as Legg Mason’s Bill Miller, somewhat disingenuously argue that the doubling in stock prices is reasonable within the context of a doubling in corporate profits.”
“Peaking profit margins, unsustainable and artificial government deficits, surging commodity costs, ever declining housing prices, and the removal of free money should pressure share prices in the back half of 2011. Some defensive stocks are so cheap, they could rally in a correction. I expect to sell all my remaining g-ice/risky stocks in the next month or two, and position my portfolio in a very defensive manner.”
“Though clearly not as extreme as at its polar opposite and oversold condition at the market’s generational low in March 2009, today’s overbought market holds a new and different list of fundamental, geopolitical, technical, sentiment and valuation risks. At the very least, in these uncertain times, hedge or purchase protection.”
From general public investors:
“My bond fund has doubled in the last 10 years. I didn’t know a bond fund could do that! Should I move all my money out stocks and stock mutual funds and put it into bonds and bond mutual funds instead?”
“There’s a lid on stocks and the upside potential seems limited at this juncture …”
“Oil prices are starting to push gas to scary levels. As earnings season kicks off, we are particularly concerned about how consumers are reacting to bigger hits at the gas pump.”
“Tech stocks are stuck, plain and simple.”
Am I the only one sensing a theme around here? The professionals are wondering why they aren’t more “short” and looking to sell any and all strength. The general public is scared, anxious and looking to trade tech stocks for bonds. I’m literally overwhelmed right now with the bearishness that is reigning here. The commentary and feedback I’m getting right now is getting to be on the extreme side of things, probably about 80% negative.
Gauging market sentiment from such flow is obviously going to be more of an art than a science, but that’s what 12 years of experience are for. I can tell you that most of the time when my sources and my in-box flow are this negative, bearish and worried — it’s usually a good time to be buying.
Recall back when the markets were 10%-15% lower than their current levels that I’d written a similar newsletter about using this sentiment feedback flow as an indicator, and had explained the dynamics behind it — when the bearishness is this extreme, the long-only/bullish managers will start to chase rallies on any good news. The bears start to panic and chase to cover their shorts, further fueling a boom.
The public then comes in and we get the final near-term kick at just about the time that most of the flow in my in-box is full of professional managers telling me how the market’s are cheap on such-and-such metric. The pros are planning to buy dips while a bullish public asks if they should sell bonds for tech stocks … That’s the time we should probably look to sell the rallies and be fearful.
The Revolution Investing portfolio, which is focused on delivering some big and other safe returns on each individual position over the intermediate- and longer-term has more than twice as many longs as it does shorts for the many bullish macroeconomic and geopolitical reasons I detail each and every week. But even in the shorter-term, as we head into earnings, I think the sentiment and perhaps the charts and the fundamentals are all set up for another move to the upside.
