What is the harder trade?

Markets were lower, then higher, and finally lower again.  Is that u-turn an ominous sign or simply the indecisiveness of the market trying to fool everyone?  I keep hearing bears talk about the widespread optimism and hope filled market, but I sure can’t find any of those market optimists.  Maybe they are hiding from me.

S&P500 daily at end of day

MARKET BEHAVIOR

The market opened lower on Tuesday, but first couple hours showed a strong rebound rally and no doubt sent some late shorts running for cover.  Unfortunately the market rolled over not long after because additional buyers failed to step in and support those price gains rally.   The market covered a lot of ground, but volume was just average as neither bulls nor bear were driven off in large numbers.

The trend remains lower and Tuesday’s early price action marked a new low for this pullback.  A lot of times these selloffs climax in a ‘V’ bottom, but the longer we trade at this level, the less likely we’ll carve out a ‘V’ bottom.

MARKET SENTIMENT

I keep reading articles and investor opinions that say the market is too optimistic and filled with hope.  But the thing is I can’t find any of those reported articles full of optimists and hope.  Maybe I am looking in the wrong places, but I am finding very little hope and even non-investor types are debating the Fiscal Cliff with everyone they meet.  Heck, today I even read a well-reasoned article on why the Fiscal Cliff, Debt Ceiling, and Europe is going to send us back to the 2009 lows.  The guy was trying to make himself out to be a contrarian, but 10 to 1 the comments to his article were supporting his bearish theme.  It sounded more like an echo-chamber than legitimate contrarian views.

No doubt the bears could be right and we have only seen the tip of the iceberg, but traditionally the markets don’t work that way.  We don’t see 50% declines when the biastras at Starbucks go on about how screwed this country is.  50% declines happen when that biastra is bragging about the dot-com stock he just bought or how many investment houses he owns.  We are miles away from that type of widespread irrational exuberance that leads to bubbles and massive corrections.

As for the notion that our economy is on ‘life-support’, that is what every recovery looks like.  Selloffs are only buying opportunities because the crowd is too shortsighted to see the potential in the future.  Taking the other side is a great way to make money; buy shares cheap when everyone says what a bad idea it is to own stocks and sell them when everyone thinks they are headed to the moon.

TRADING OPPORTUNITIES

The market is still in a down-trend and it is risky to pick a bottom.  As I said yesterday, these levels look interesting and are far safer places to buy in at than at any point in the last several months, but I could easily be a bit early in expecting a rebound.  Maybe the market will bounce decisively this week, or maybe it will selloff a bit more before bouncing.  But either way, this is a horrible place to be short the market.  If we look at the market like a spring, the post-election selloff unwound a lot of the downside potential and there is not a lot left in the downside move.  At the same time the emotion driven selloff has compressed the spring to the upside.  I’m not always right, but I’m okay with that if my mistakes are small and my correct calls are large.

Stay safe