Risk Is A Subjective Experience
Market
Trend: None
Market Outlook:
Hamletian (To Correct or Not to Correct?)
David’s Pick: Short the
Diamonds (DIA)
Peter’s Picks: Short Jim
Cramer, Cash
Sector Watch: Up
— Bonds; Down — The Broad Markets
Navarro’s Broad Market Outlook: Risk Is A Subjective
Experience
Last week, I gave a talk to a sophisticated investment audience. I asked the
50 or so people how many held at least some short positions in their portfolio
and only ONE person said yes. I then asked how many people were long the bond
market and almost half the people had some of their portfolio in bonds.
Now the reason these folks gave for not going short and being long the bond
market was that being short is “too risky†and the bond market is
“safe.†Laughing out loud at that point in talk would have been
rude so I didn’t do it. But think of the irony.
Being long in a topped out, correcting, and possibly now soon-to-be-trending-downward
market is a lot more risky than buying a few put options (which limit losses)
as a hedge. And being long in the bond market has such an incredibly unfavorable
risk-to-reward ratio as to be truly laughable. After all, on the short end,
bond prices have nowhere to go but up, and on the long end, bond prices could
fall a bit, but the far more likely event in a world of burgeoning US. trade
and budget deficits and incipient cost push inflationary pressures is UP.
My
broader points:
· The (long) bond
market isn’t necessarily safe
· Learning how to judiciously use put options to hedge downside risk
is smart
· If you still hate the idea of being short, think of cash as a quasi-hedge
for the downside.
My bottom line: I called
for a move into cash in the middle of January, which is when the market started
this latest unraveling. Nothing has happened to change my view of that.
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^next^
On Monday, we get a good
look at the guts of the nation’s manufacturing base. So far, production
is up but capacity utilitization is low enough to fend off inflation.
On Tuesday, Sir Alan will get a chance to jiggle the markets with another inscrutable
twist of the language — recall we went from a “considerable periodâ€
to the shorter run “patience†language last time and the market
got nervous about an impending interest rate hike.
On Wednesday, the CPI arrives on our doorstep. Am I the only one worried that
inflation is going to bite us sooner rather than later? Look for a big spike
in the non-core sector measuring energy. As for mortgage apps, the “expertsâ€
are predicting another resurgence of mortgage and refi activity with the latest
dip in the long end of the curve. I half agree but just think the refi market
is tapped out — a bad sign for consumption at a time when sentiment is
failing.
On Thursday, we get to watch more jobless Americans twist in the outsourcing
wind. The good news is that claims aren’t rising — but they ain’t
falling as well (with apologies to my English teachers).
On Friday, watch the ECRI. It actually moved back up last week — a good
sign at a time when the bulls could sure use one.
David’s
Pick: Short DIA (The Dow ETF)
Last week brought a “Dow Theory†sell signal for the Dow, as the
DJ Industrials broke down confirming the divergence and breakdown in the DJ
Transports. Prior, the Dow has been the last of the major indices to crack after
a bull run, and this time has been no exception. A look at the daily chart below,
in my “Technical Take†column, illustrates a top is in place, and
internal technical weakness is confirming the move down. As always, control
your risk, by following money management guidelines which are in line with your
level of risk tolerance.
Peter’s
Picks: Short Jim Cramer
This week started out ugly.
I quickly went from up 10% to being up only 3%. But I never lost faith and am
pleased with the current positioning of the portfolio. I had amassed nearly
20% of my portfolio in cash and spent half of it this week, picking away at
my shopping list when I saw that perfectly good companies were selling off for
no other reason than investors just couldn’t handle the pain. I track a wide
range of equity mutual funds, and we’re still in front of the pack after this
week’s losses. The good news is that the week ended on a high note, and I think
the worst of this latest selloff is behind us.
Jim Cramer’s Action Alert
The lovable teddy bear Jim
Cramer is sprinting headlong down a road that can only bring him ridicule. For
anyone who has read his several books (me included), it’s perfectly obvious
that Jim is an entertaining, bombastic celebrity but also an obsessive, compulsive
trader. Rather than be content with his bully pulpit on CNBC, Mssr. Cramer is
putting his real money on the line in an “Actions Alert†Street.com
promotion in which he e-mails out his stock buys and sells with lightning speed.
What’s obvious is that Mssr. Cramer has no clue about the direction of
the broader market. For fun, you might want to simply short his picks for a
while in a fantasy portfolio. You’re likely to make more money than throwing
darts at a stock board.
Aloyan’s Technical Take:
All three major indices (Dow, S&P 500, and Nasdaq), experienced a significant
deterioration technically, and finished the trading week in the red. The Dow
finally cracked, confirming the negative divergence that’s been going
on in the Dow Transports and bringing about a “Dow Theory†sell
signal. Of importance, is the fact that the Dow has previously shown resilience
at bull rally tops before declining, while the Nasdaq was weak—