Complacency

There is an air of complacency in the market as fear no longer exists, unless one considers the fear of missing a rally. Bad economic numbers, sovereign spreads blowing out, currency wars, commodities surging? No problem, QEII is on the way.

Complacency is a very dangerous emotion in the stock market but that does not mean that the market is necessarily headed lower. Complacency only becomes dangerous once major investors have high equity allocations. This rally started 22 trading days ago at which time pessimism was widespread and equity allocations were low. Is 22 trading days enough time for the crowd to re-risk? I suspect that they still might have some firepower left.

I much prefer to buy at times when fear is widespread like at many points during the Summer. I have little interest in new purchases right now. But knowing that this rally started off of a base where the major players were de-risked, I am going to continue to err on the side of caution and give the rally room before trying to fight it. By late next week the rally will be thirty trading days old and the turn of the month will have passed. Better to wait and fight a tired, complacent bull.

3 comments:

Anonymous said...

I read about your blog from a comment in another blog... I just wanted to pass along major kudos to you. There is a lot of consensus thinking, doomer and other blogs - but in the past 2 days of reading I have been very surprised by the frank, clear and rational thinking you've been posting. very refreshing. Thanks

ps. I happen to very much agree with your sentiment and thinking... time to be cautious. Only trades I've been doing lately are fully hedged long/short --
IE LONG: basket of high yielding oil royalties (WHX, PWE, MVO, BPT) and Short: OIL -- this is just about collecting 8% yield here...

Another goodie - Short TAO (China Homebuilder), long CHIQ - China Consumer ETF...

you need to watch closely but these hedged pairtrades have worked for me in the past in dodgey times..

and I agree with your posts... -- no reason to take on "risk" until valuations cool off... risk QEII doesnt manifest as the market expects...

Tsachy Mishal said...

Thanks. I really appreciate the kind words.

Chaos! said...

I agree that this move should continue on the upside. We've worked off the mild overbought condition by going sideways for a while. Because the move started with excessive bearishness it will likely surprise on the upside. The best part of these moves come late, so it's worth keeping a decent long bet on.
The big negative has been the financial stocks. If they breakdown all bets are off. I think a more likely scenario is that financials manage a rally which forces the bears to finally throw in the towel. That's when the excitement starts!