The constancy and consistency of the move higher is leading many to re-evaluate their fundamental beliefs.
Gone are the 'new normals,' the balance sheet recessionistas, and the perma-bears, and in their place are newly minted momentum 'guys.'
It is easy to rationalize the market, to find data to support a particular contention, and ultimately to justify a position. It is hard to run against the herd, to fight the forces that be, and to be handed a beat down by the market.
It speaks to something deep within us. The acknowledgment that we are wrong.
We are all momentum chasers now! (or, is it Game of Chicken players, or Musical Chairs participants).
Wednesday, February 16, 2011
Friday, February 11, 2011
A Back of the Envelope on the Pullback
I've been concerned that the mega caps haven't participated in the rally, and their playing catch-up will in fact drive the market higher (even as we get a rotation out of smid caps).
Consequently, when you look at the Naz and S&P 500 I'm not expecting them to fall too much. Doing a back of the envelope of the major indexes:
* 50%+ of each index is comprised of stodgy mega-caps trading at an average of about 15x forward earnings (even when you include Apple and Google and Amazon).
* It seems obvious to me that the large caps are undervalued relative to the smid caps. Smid caps are trading at roughly 18x forward earnings (and that might be understating it).
* When the "risk on" trade expires and the "risk off" trade returns, it is easy to see a little pullback and rotation along the following lines. Large cap multiple compression from 15x to 14x (6%-7% decline), smid cap multiple compression from 18x to 15x (16%-17% decline)....translates to a 10% market decline (assuming a 60/40 large cap/smid cap breakdown - in fact the breakdown is closer to 88/12).
In the absence of any serious weakness in earnings (and the economy), it is highly unlikely that we will see much more than a 10% correction, unless PEs were to compress due to some major risk factor.
Consequently, when you look at the Naz and S&P 500 I'm not expecting them to fall too much. Doing a back of the envelope of the major indexes:
* 50%+ of each index is comprised of stodgy mega-caps trading at an average of about 15x forward earnings (even when you include Apple and Google and Amazon).
* It seems obvious to me that the large caps are undervalued relative to the smid caps. Smid caps are trading at roughly 18x forward earnings (and that might be understating it).
* When the "risk on" trade expires and the "risk off" trade returns, it is easy to see a little pullback and rotation along the following lines. Large cap multiple compression from 15x to 14x (6%-7% decline), smid cap multiple compression from 18x to 15x (16%-17% decline)....translates to a 10% market decline (assuming a 60/40 large cap/smid cap breakdown - in fact the breakdown is closer to 88/12).
In the absence of any serious weakness in earnings (and the economy), it is highly unlikely that we will see much more than a 10% correction, unless PEs were to compress due to some major risk factor.
The Slough of Despond
It feels like we are in the slough of despond.
Fighting a market is not a wise thing (least of all on the positive side of the economic/market cycle). Taking your medicine and getting with the game is always easier said than done.
The markets incessant march onward and upward since its August lows is wearing us down. Just "buy the dip" is the mantra of the moment.
I'm thinking we're not far from a nice pullback, and "sell the rip" is probably a better banner.
Doubling down is a very dangerous sport, but can sometimes cover over a multitude of sins.
The courage to be, and the courage of ones convictions are in short supply. But at some point you've got to take a stand.
Fighting a market is not a wise thing (least of all on the positive side of the economic/market cycle). Taking your medicine and getting with the game is always easier said than done.
The markets incessant march onward and upward since its August lows is wearing us down. Just "buy the dip" is the mantra of the moment.
I'm thinking we're not far from a nice pullback, and "sell the rip" is probably a better banner.
Doubling down is a very dangerous sport, but can sometimes cover over a multitude of sins.
The courage to be, and the courage of ones convictions are in short supply. But at some point you've got to take a stand.
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