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“A leader is a dealer in hope”
~ Napoleon Bonaparte
 
From The Wrestlers to the Raccoons out there in this marketplace, President Obama has his hands full. There is no doubt that this man inspires hope – and he did his best in changing his tone to a more hopeful one in last night’s address – but hope, as we say here at Research Edge, is not an investment process.
 
Napoleon proved that inspiring men to fight for you is the best way to win. He also proved that when hope morphs into doubt, your fate falls by that very same sword. Make no mistake folks, the breaking down through the November 20th support levels that we saw on Monday matters. The Crisis of Credibility that this country faces will not be resolved by a bear market rally, or a good speech.
 
Yesterday, I had twice as good a day as I had a bad one on Monday. That’s how it goes when you sign up to dance with a bear that you’ve beaten before. Once you are locked into that cage match, and the entire market calls you dead – the only thing you can do is trust your process, bury your head into that bear’s chest, and know in your gut that that’s the one moment that you’ve proactively prepared for.
 
The SP500 closed up a strong +4% yesterday at 773, pairing its YTD losses for 2009 back to -14.4%. Volatility (measured by the VIX index) took an elbow smash to the forehead at down -14% on the day, while volume on the NYSE ripped the hair off the short seller’s head, moving +10% versus Monday. The squeezing of temples in the Financials (XLF) was pronounced – the XLF ETF closed up +12% on the day. Citigroup (C), which we said (on our Monday morning client call) could put on a +35% move from Friday’s close, tagged the bears in the butt for a +22% gain, taking its cumulative move from last week’s “nationalization” low to +33%. I don’t want to touch Citigroup here.
 
The market’s breadth expanded alongside accelerating volume into the close. The Advance/Decline line on the NYSE was 81% for advancers versus 17% decliners by the time the bell rang. One, Two, Three… the daily dance with the bear was won.
 
Now what Mr. Wrestler? Well, as one of the finest of Wall Street memes goes – “that’s a great question.” And I’ve already locked my answer on the tape – selling into the close was the prudent move to make. When you look at the last 150 years of trading in this country, not selling anything on +3-6% up days during bear markets would render me part of the thundering herd. I don’t do herds.
 
Make no mistake, fully loaded with whatever hope our new President wants to issue, the intermediate “Trend” in this market remains bearish. Unless we can close above 824 in the SP500, that will not change. Can you position yourself in the cage match to make bullish immediate term “Trade” moves? You tell me … some people say they “don’t do trading”… others said they didn’t “do macro” either. I do both.
 
Until the next bull market returns, this is a market that needs to either be traded or avoided. If you “have to be invested”, I suggest you trade your exposures even more aggressively. Otherwise, you may as well dress up like a WWF Wrestler and keep pretending that “investing for the long run” works right here and now.
 
In our Asset Allocation Portfolio, by the time yesterday’s bell rang, I’d sold down the exposure that I grossed up in US Equities from 29% to 18%. I held onto that long position I bought in the QQQQ (Nasdaq) at 3:27PM EST on Monday, and while I don’t know if that print looks lucky or brave, it really worries me.
 
Whether you are pretending to be a wrestler or risk manager, I think you should always be worried. You can and will be wrong – so the best process is to perpetually question the validity of why you think you can be right. I never used to worry. Between the years 2000 and 2004, I’d built up such a consistently solid performance run that I got cocksure of myself, like a lot of men and women of the hedge fund gridiron do… then I got body slammed for a quarter and, trust me, it had an impact.
 
I’ve trained myself to worry about being wrong, because that’s what you should do when serving as a fiduciary for other people’s money. They worry about their hard earned money every day, and given the level of socialization rhetoric brewing in this country right now, so should you.
 
President Obama,
 
Thank you for your message last night. But today is another day in the ring for we who are wrestling the bear. No matter where you think this market is going this morning, there it is. My advice for you, Mr. President, is the same as it has been – break the buck. Until you figure this out, you will not stop deflation. Irving Fisher was of this view, and John Maynard Keynes was not. Last night you said, “I, get it…”… but do you really? Fisher vs. Keynes – it’s going to be a cage match, and all I can do right now is hope that you “get” that message.
 
I remain short gold and short Asia. In the USA, my new downside support level in the SP500 is 732, and immediate term upside target is 793. At down -5% vs. +3%, the risk in this market once again stands taller than the reward. Trade and tread carefully…
 
Best of luck out there today,
KM

 

Dealing With Hope - etfs022509