Nobody Said It Was Easy

I am going to start by giving the bull case. Everybody and their mother thinks that QE II will be a sell the news event. Many are looking to buy the ensuing pullback as few believe the pullback will be deep. Since when is the market in the business of giving everybody what they want? There is also the fact that sentiment refuses to turn bullish to an extreme as is usually the case after such a strong, extended rally. Add to all that the well known bullish seasonal factors.

All this keeps me from trying to fight this rally but I cannot get behind it either. The market is extended and while sentiment is not extreme, it is overly bullish. The fundamentals for the market and this rally are built on fragile foundations as those who buy on "liquidity" can easily turn sellers for just as flimsy a reason as we saw in April. In addition, I am finding less and less individual stocks that seem attractive. I am still agnostic and waiting for better opportunities.


Anonymous said...

It sounds like you have already done well this year. You are right in waiting. Better, more obvious, opportunities will come. They always do.

Tsachy Mishal said...

Its always better to hold off when opportunities are not that great.

Anonymous said...

One line of thought that I don't see much discussed is that QEII and low interest rates, all other things being equal, will tend to increase supply in capital intensive industries, thus driving down profits for existing suppliers. Think mining. Borrow for 10 years at a low rate of interest to increase gold supply, and simultaneously lock in profits for this new supply by selling in the futures market--a low-risk proposition. And other examples spring to mind. QEII could just as well be deflationary, in other words, as inflationary.

Maybe the emerging economies will bail everyone out with a huge stimulus program (as opposed to dragging us further into deflation with a collapse of the China real-estate bubble and the various commodities bubbles). Otherwise, I see corporate profits declining in the years to come, for all sorts of reasons, and that should be enough to push the stock-market down. With the shorts pretty much wiped out and thus nothing to stop the decline once it starts, the sell-off could be violent.

I hate shorting, but this feels like the time. It's always darkest just before the dawn--though maybe this isn't the best image for describing what a top feels like.

Tsachy Mishal said...

I agree that investor sentiment is overly optimistic. My biggest fear on the short side is corporate M&A activity. Rates are low and companies are on the prowl. Up until now there has been more talk than action but that can change.