Conflicting Thoughts

I have conflicting thoughts as to the near term direction of the market. The market has some issues such as the overbought reading on both the NYSE advance-decline line and the put/call ratios. On the positive side it seems that there is little belief in this rally and that the pain trade is higher.

The average hedge fund was down between 4% and 9% last year depending on which index one looks at. In contrast, the total return on the S&P 500 was +2%. Most managers came into the New Year positioned defensively. The large rally yesterday put them behind the market to start the year and the pain trade is higher. Few were excited about the markets rise yesterday and that is a good thing.

As a result of my mixed feelings I have pared back my shorter term trades but am sticking with a medium sized core portfolio. Given these mixed signals I expect a decline to be contained barring a severe worsening of the crisis in Europe.

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