Oct

29

A few months ago, I observed that there was a bull market in bearishness underway. In addition to the AAII bearish consensus that rivaled the 2008/2009 lows, there was a consensus that the Fed had run out of bullets, that Europe was kaput, that HFT bots had taken over the casino; that a January hike in tax rates would smother any recovery; that equities yielding more than comparable bonds didn't matter; that decent earnings didn't matter either because they were due to efficiency rather than revenues; that Congress and the White House would continue to pursue a stock-unfriendly agenda; and (of course) Google Hits on Nouriel Roubini spiked to a cycle high.

Today, we face a mirror image– just as we approach next week's trifecta: Fed, election, jobs.

The AAII bearish consensus at 21% has made a three year low; the Fed will launch its well-telegraphed latest policy adventure; Germany is growing, France and the UK are biting the bullet; there have been no more HFT dramas; the January tax hike is anything but certain; equities have had a meaningful rally — while bonds have been rather soggy; the Democrats in Congress are not asking "if" but rather "how bad" they get spanked; and Mr. Roubini's google hit count has fallen below the radar. The only bearish story that I can find right now is the banks continuing ability to shoot themselves in the foot…

I make no attempt to "call" the market on a day-to-day basis, and I'm neither particularly bullish or bearish — and have no clue whether the next 5% is up or down. But as someone who likes to always have dry powder on hand (for both fading the nattering nobs of negativity and avoiding chafing after warm showers), the previous paragraph demands that I put a few canes away in the attic before next week's trifecta. In addition to my concern about equities, I'm especially concerned about industrial metals.

No matter how many years that I do this, I always buy early and sell early. But this allows me to go to bed early and get a good night's sleep.

Ken Drees  writes:

There seems to be a general consensus feeling that the market will sell off after the election/qe2 news– the market has bought the rumor and will sell off like textbook trading 101. In keeping with a contrary eyebrow raised, a market surging up next week may well rip any bearishness out by the roots– and send the bearish consensus plunging even more.

A better and more diabolical market may well drop 300 dow points after the fed news and then turn around and rip higher to end the day up 200. Now that would be ursa major horriblis.

market is flat calm today for the most part–vol is coming.


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  1. Alaric Investments on October 29, 2010 1:13 pm

    The ISM number Monday may provide some direction, perhaps down…

    Vol should be coming - particularly around the concept of QE / monetization. How QEII can be said to be good for the equity market is beyond my comprehension - to me, the fact that the Fed is making it up as they go along should lead to a higher volatility and discount U.S. assets generally as nobody will really know when a certain group of mandarins will choose to turn on or turn off the purchases…..

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