This is an absolute pain trade right now. The Dow just reached alltime highs two days ago, having magnanimously reversed a poor overnight session in the futures markets (ES low -63bps). DJIA printed new-er highs again today. Since Dow 14k made front page headline news, alltime highs gets a horse & pony show complete with fireworks shooting out of asses (pun intended). It’s times like this that not only test your process as a money manager, but also your psychological mettle.
My posture has been short term bearish, but these new highs are exactly what I’ve been forecasting as part of the process:
“The daily  overlay says we’ll glance oversold territory in the coming week, perhaps reaching new highs before turning south toward a fresh monthly low.”
Coming into this week, I knew the vindication of my expectations would make me an unlucky winner. My whole short term forecast is fraught with logistical misfortunes. First off, quarter-end window dressing is rapidly approaching, and the process of market ebb & flow doesn’t look like it’ll be complete in time for me to gain ground on SPX or suitably deploy my excess cash.
Yes, I raised cash in preparation for the fall, in accordance with intermediate term targets that were premeditated. In retrospect, that conservatism feels ill-conceived–why sell into a 3% rally to avoid a 3-4% selloff!? Performance-wise, it just hasn’t worked out so far, but not due to the portfolio management (i.e. allocation), but rather the singlename stock selection.¹ I [still] view the tactic as a way for me to refresh the portfolio by purging legacy positions, letting a storm blow by, then sveltely rotating the cash into thematic sectors that fit my 2013 thesis, like Durable Goods, Basic Materials & Regional Banks. Since probabilities lean(ed) toward an ephemeral market pause, it made all the sense in the world for me to step aside, then accumulate my high-beta names after they’ve overshot their short term downsides. I’m left playing catchup nonetheless.
Finally, the least of anyone’s concerns, I personally pay a vast psychological toll at times like these. Today, we’re at one of those forks in the road, from which a turn higher in SPX would leave me in the dust before I have time to accelerate, or a turn lower will send past me the market speeding in reverse. I’m objective and flexible enough to change my opinion as the fundamentals change (or as I’m flatly proven wrong)–I’m great at mea culpas–but damn, it’s hard to stick to my analysis when CNBC’s wheeling in the bulls, one after another, calling for new, unheard of highs, ‘buy today or miss out on tomorrow.’ This isn’t NASDAQ circa 2000 yet–we’re only now transitioning from optimism to excitement–but for a couple weeks I am shaving against the grain with what increasingly feels like a butter knife. (It is worth noting how busy the new offering calendar has grown in the wake of the Dow’s high. A lot of syndicate activity coming in the next 3 weeks with some IPOs and a lot of followon secondaries.)
I’m making this sound like more of a failure than it has been to date. It’s just been torture for a money manager sitting with contrarian posture for just under a week now. Fact of the matter is, nothing has happened to disprove my short term thesis. In fact, it’s been precise so far. We’re at new highs, now here’s where the quick turn lower should arrive–the completion of this vexing call I’ve made. If we don’t get a turn within a full week, then mea culpa, because I’ve already acknowledged that something bigger is underway anyway: I continually have to remind myself that the inexorably bullish long term trend should be my focal point at all times. That’s the most important, overarching theme.
¹We’ve gotten picked-off this quarter in singlenames like Cliffs Natural Resources (CLF), a 2.5% position, and FusionIO (FIO), a 1.5% position. We’d ridden CLF from dip to top twice in the last 3 years. CLF cashflow missed guidance by a long shot throughout 2H12, but I saw their inventories accumulate in [what I thought was] a conscious choice by management to wait-out a collapse in global iron ore spot prices. I was right, CLF management didn’t want to sell product into a dislocated market, they waited, and the market came back. As of 2/2013, iron ore prices had almost doubled to $130, so I opened my position, thinking that they’d preserve their fat dividend. As it turned out, CLF had waited too long: they needed cash, so slashed the divided and diluted shareholders with a dual tranche offering. Psychologically, it’s in the dog house; I’d prefer to unload (5 points ago) and reengage when value’s met <$20, but my partner strongarmed me into holding. Then there’s FIO. FIO will be fine. We rode it from $20-30 last year, sold half the position, then started buying again this week ~$16.5 (after it gapped down from $20-18 to open February). Their latest version of flash memory storage should see some adoption and implementation later this year, but that was longer than the Street expected, so the stock took a hit. Those bombs were hard to argue. Elsewhere, I see psychological stress being manifest by investors who feel this market’s running away from them. Some of our other holdings have borne the brunt of that, like TIVO and VirnetX (VHC), which have enormous catalysts only months away. The time value of money seems to carry a much larger premium for equity investors than bondholders all of a sudden. (That means I expect DELL shareholders to accept their LBO offer, which grossly undervalues the company, but offers instant gratification–unless someone has a ready counteroffer.)