The stock market is bipolar creature, driven by sentiment and irrational expectations. One day, it is an ingenious forward looking mechanism that anticipates and discounts future events beautifully. Another day, it is a stubborn schizophrenic that can’t see further than its nose. It is what it is. You either adopt or leave the scene.
Traders and European politicians have been in a Mexican Standoff for the past few weeks. While the yield on the Italian bonds was rising to record levels, U.S. equities acted like it didn’t matter. Most traders were absolutely sure that at the end of the day, the Germans’ reluctance to monetize will be broken. It is not an accident that gold rallied over the past 10-12 days. Well, traders blinked first and exits were hit.
Today, we are in no man’s land, driven by headlines and an environment where macro issues overshadow individual catalysts. I don’t want to have any market exposure overnight (long or short) and prefer to stay in cash and wait out the storm. If there is an year end rally, there will be plenty of better risk/reward opportunities ahead. There is no reason to hurry and buy dips here. If this is the beginning of a more serious correction, forced liquidations will bring prices much lower and offer better bargains. I consider both scenarios totally possible.
They say that if you understand people’s incentives, you can predict their behavior. At this point, I am not sure I understand what is driving people’ decision making. Is it the fear of underperforming or fear of losing money, Is the Return OF Capital more important that the Return ON Capital. When in doubt, stay out. While it is true that uncertainty is a second nature of the market, there are days when the market fog doesn’t let see you far enough to justify risking any money. Soon, things will get more clear. Until then, I will limit my market adventures to the occasional intraday scalp when a good opportunity presents itself.
Of course, what is good for me, might not be good for you. I manage my capital fairly aggressively, opportunity cost is a huge factor in my decision making and I change my stand quickly. Such market approach requires being very nimble and willing to stay in cash when you have to.