Bears Give Up

Prominent bears, Alan Abelson and Nouriel Roubini, have thrown in the towel and are no longer bearish. They are not the only ones as it is difficult to find any prominent bears these days. $55 billion flowed into equity mutual funds and ETFs in January, the most since February 2000. John Paulson, David Tepper and Ray Dalio have all come out bullishly recently. There is a very positive mood towards stocks from pundits, the general public and professionals.

This unanimous bullish sentiment is not generally seen at great buying points. When sentiment is this bullish there is usually a better buying opportunity ahead but it could take a while to get there. Extreme sentiment can persist for months and trying to fight it is a grueling process. While I am roughly market neutral I have not decided to fight this yet. If I do it will likely be via puts. With the VIX under 13 puts are cheap and give defined risk in case this rally keeps grinding higher.

They Won't Get Fooled Again

After a brutal bear market from late 2007 to early 2009 investors were traumatized. In the ensuing four year bull market there have been numerous false alarms where investors thought they were headed for another 2008. The fear of the double dip, the Euro crisis, the US downgrade, the BP oil spill, the flash crash etc.. Each time investors panicked and were made to regret it. It seems that investors have finally learned their lesson and are determined not to get fooled again.

Two weeks into the New Year sentiment is nearing a bullish extreme as investors have been trained not to get shaken. At the same time many of the stocks I own are reaching my price target and I am having a difficult time finding new ones to buy that meet my value criteria. This combination has brought my portfolio to a market neutral posture.

Each time during this bull market when sentiment went to a bullish extreme there eventually was a better entry point for patient investors. Sometimes the exuberance lasted for months but eventually there was a better buying opportunity. It is possible that this time will be different. Maybe investors won’t get scared out this time. Maybe corporations will finally take advantage of the cheap money and lever up. Maybe this bull market will finally reach a level of exuberance typically seen in the late stages of a bull market.

I recognize that this time could be different but I will not invest that way. Sitting on the sidelines while everybody is making money is difficult and not enjoyable. But permanently losing money is even less enjoyable. Buying when there are values and investors are fearful has served me well over the years. That is what I intend to do even though the party seems like a lot of fun.

Removing Emotion From Investing

I recently wrote a post for Amazon's Money & Markets blog about removing emotion from investing. Please visit Amazon to read.

Late In The Game

Investors poured over $20 billion into equity mutual funds & ETFs in the first week of January, one of the highest inflows on record. Many sentiment indicators I look at are approaching extreme levels of bullishness although are not quite there yet. Anecdotally, I am seeing a  lot of bullishness out there. These are not the conditions I prefer to invest under.

There is very little worry out there even though we are about to see the largest tax hike in decades. While one can argue that the tax hikes on the rich will not effect the economy, the payroll tax hike will hit everybody and will be an incremental negative. There will also likely be cuts in government spending come March. Its possible that the economy will continue to chug along despite these headwinds but this is not a time that I want to make big bets.

I have been reducing my long exposure and am now only very modestly net long. I don't generally play for the last few percent of a rally and that is where I believe we are. Have  a great weekend.

My Outlook For 2013

Heading into 2013 it is possible to make both a convincing bull and bear case. When I have felt strongly about the direction of the market I have not been afraid to communicate it here. This is not one of those times.

The bear case is that the current bull market is almost four years old, which is already longer than the average bull market. Taxes will be going up and its likely that there will be some spending cuts. This will create a fiscal drag on an economy that is already in slow growth mode.  We are seeing slow growth around the world as well which increases the chance of an economic accident.

The bull case is that we have still not seen the euphoria phase of this bull market. Valuations remain reasonable and market participants stock allocations are on the conservative side. Corporate borrowing rates are at record lows yet we have not yet seen companies take full advantage of these rates. The level of cash M&A, LBOs and share repurchases have been on the low side considering where rates are. A buyout boom fueled by low rates is a real possibility. The fuel is there. Somebody just needs to light a match.

If the economy manages to stumble along investors are likely to be rewarded with a fifth year of this bull market. However, there are many risks out there that can tip us into a recession. My plan is to stick with companies that are less dependent on a strong economy, buy fear and sell euphoria.