Irony

There is great irony in the fact that the day after Thanksgiving used to be a trader's dream in that many institutions did not participate and the volatility in the market and especially smaller cap stocks was intense.... now, in the Year of Volatility - this is shaping up to be one of the quieter days in months. Just another bizarro event.

In the category of badly designed instruments, both Ultra Real Estate (URE) and Ultrashort Real Estate (SRS) are trading up today... wonderful.

We continue to remain bullish as long as the S&P 500 holds 870. There are many times in bear markets you get multi week or multi month rallies; what the market has just gone through in fact is more atypical than typical (falling off a cliff with no respite for months on end). This doesn't mean a new bull market is upon us, or things are really improving - but we were 37% below the 200 day moving average a week ago - a level of oversold never seen before in US market history . Reversion to mean happens eventually.

Again, it is not the news but the reaction to the news - it seems like eons ago but 1 week ago today we broke 2002 lows, Citigroup was on the brink and until the 3 PM Geithner announcement we looked to simply have no bottom. Now everything is rosy. The reality is very little has changed in the economic outlook or credit markets (except the mortgage market which Tuesday's announcement of coming infusion did in fact affect rates) - it's just sentiment. When you sit and really analyze what is said on financial TV in any 30 minute period, almost every 3rd sentence is about what the government/Federal Reserve is doing. It is really startling when you take a step back and realize every investing thesis now is based on what a few head honchos in Washington (or London, or over in China, or in Frankfurt) will do and nothing about basic company fundamentals anymore. I think those that follow the market have started to get conditioned to it because until I really thought about it and compared it to things I used to think about 2 years ago, 5 years ago and 10 years ago - it is a striking contrast.

Of all our conditions to construct a more bullish outlook nothing has changed except for one "reaction to bad news" - stocks have been rallying in the face of bad news this week. Everything else unfortunately still remains the same. I used to run weekly screens of stocks that outperform or underperform - it has been useless for months since everything trades in monolithic nature. On good days, throw a dart and you have a 90% chance of riding a stock up - and vice versa. It is impossible to tell where the relative strength is because it's all student body left (or right) trading. Until the market begins to act rationally and not in such herky jerky moves, either up or down, there is really a great difficulty in buying individual names as fundamentals of stocks are not respected and it's all about sentiment of the day i.e. sell infrastructure stocks because no one can get credit! 48 hours later... buy infrastructure stocks because Obama will flood the US will paper dollars! There is no investing there.

As I watched this morning's mall rush I could only be reminded of lemmings at the edge of a cliff - CNBC reported that 90% of purchases were credit. We are very slow learners.

One last point since I am getting a lot of emailed questions - I know people come to the website at different times so my "strategies" are not laid out for easy reading all the time. Unlike the vast majority of mutual funds I'm running this more like a long-short hedge fund but with a long bias... the reason for the long bias is because, frankly, 99% of investors go and look for typical mid cap growth, large cap growth, small cap value, etc type of funds, not the very small niche of 'long-short mutual funds' of which I've found maybe 5. Maybe that will change, with a stock market that has gone nowhere for a decade per the major indexes. But to attract attention the mainstream financial media sources almost solely focus on long funds and their charts, tables, "best of" lists all rotate around the status quo. Hence why, despite being bearish since August 2007 tried to maintain 50.01%+ long exposure "most" of the time. That said, who knows how a Morningstar would categorize this type of strategy - I don't know.

Another question comes to why I hold short exposure on a rally. Well, first I have no crystal ball - no one told me a 16% rally was coming this week. Second, and pointing to the previous paragraph I will ALWAYS have some short exposure as a HEDGE - so I don't stop out of short exposure; I just cut back (and I don't even have stop loss ability in the Marketocracy.com account). This mutes some upside performance but also mutes the downside performance. When I am more bullish I have less exposure on the short side, when I am more bearish I add exposure on the short side. I layer in and out of positions - for example I've held Ultrashort Real Estate (SRS) and Ultrashort Financial (SKF) in the fund since August 2007, even as the market ran to all time highs in October 2007. I lost money at times, and now I've made a lot of money in those instruments. Sometimes I had them as 0.2% stakes, sometimes as 2% stakes, and sometimes as 6% stakes. But they never leave - it's all weighting based on how the market seems to be trending. While I do exit and enter some positions completely, some I've kept since inception or over a year, or however long. Even at my most bullish I'd still keep some proportion of short exposure as 'insurance' because anything can happen and that's the strategy we go with. From the email I get I assume many readers have an "all in" or "all out" strategy in regards to individual positions - and mistake my having a stake in something as either bullish or bearish. I take a more incremental approach and approach things more holistically and with an eye to portfolio construction. I might not be bearish on X but since I'm bullish on Y I want to have an offset. Or when I sell ABC, but I want to maintain long exposure I buy XYZ to offset - doesn't make me more bullish on XYZ. For example, as I have been selling some individual names or cutting back into this ramp I've offset some of it wil buying of Ultra Russell 2000 (UWM) so I can have exposure to upside without dealing with individual names; in case we have a quick reversal down. Does that mean I'm more bullish on an index than stock ABC? No. It's just portfolio construction.

Also, let me remind I am not using instruments I prefer all the time. I went through some old posts from summer/fall 2007 and last winter the past week and found about 25 short ideas - all over the map from Las Vegas casinos, to consumer discretionary to e-commerce to housing to financials. Many of those individual names have fallen 50-99% (we said both Freddie Mac and Washington Mutual were effectively going to zero) But we cannot short individual names in our tracking account at Marketocracy.com. So we've left a lot on the table. And our trading efficiency is abysmal without the ability to have stop losses, trailing stops, et al. And we have to always stay 65% invested per Marketocracy.com rules so I cannot go 70% cash if wanting to avoid the market, etc. But as of Wednesday - even with all those barriers and lack of exposure to individual short ideas we've called out, we were down (ex technical snafu from 2 weeks ago where we could trade any ETFs during a 10% reversal) roughly 10% since August 2007.... seeing the carnage in the mutual fund world during the bear, I think this strategy would work very effectively over the long run. If you take care of the downside (protect capital) the upside will take care of itself... many mutual funds are down 40-50% and will need 80-100% gains from here just to break even with summer/fall 2007. We have very little work to do in comparison to get back to even; even with the structural barriers we have in our tracking system. I do wonder if I had abandoned the 50.01% long rule earlier (we've dipped to the 40%s most of the past quarter) if we would of been positive for this time frame - I imagine yes.

Anyhow we have a quiet day on the casino; we'll see if the 3 PM crowd shows up at noon but since many of those creating the 3 PM effect are not showing up to work today we might just end with a quiet plop.