Positioning For Year-End

“An Emperor who cares for nothing but his wardrobe hires two weavers who promise him the finest suit of clothes from a fabric invisible to anyone who is unfit for his position or “just hopelessly stupid”. The Emperor cannot see the cloth himself, but pretends that he can for fear of appearing unfit for his position or stupid; his ministers do the same. When the swindlers report that the suit is finished, they dress him in mime and the Emperor then marches in procession before his subjects. A child in the crowd calls out ‘The Emperor is wearing nothing at all’ and then the cry is taken up by others. The Emperor cringes, suspecting the assertion is true, but holds himself up proudly and continues the procession.” (The Emperor’s New Clothes by Hans Christian Andersen in 1837 from a collection of Spanish stories of 1330 as summarized in Wikipedia)

Somewhat like that little boy, I feel like crying out “Cash on the sidelines lost their opportunity to buy into the market this year; there won’t be a year-end rally!” We, the market’s towns people have been hearing stories about institutional money on the sidelines waiting to be put to work before the end of the year. There was going to be a blow-out top as money plows into the market because institutions “can’t go into year-end with so much money not invested” and will “chase performance” by bidding up leading stocks.

I’m sorry - this royal idea wears no clothes. If they needed or wanted to put all that cash to work in stocks then institutions had many months already to do so. Furthermore, the market’s stellar performance over the past 9 months is an invalid reason for institutions to start putting their cash hordes to work today. Everyone knows you buy stocks today based on expected future performance and not because prices have risen 65% over the past nine months.

With only 23 trading days left in 2009, there just isn’t sufficient time left for sidelines money to be employed to generate any meaningful returns. Individual investors are going to be disappointed if they look to have bad investments salvaged by this sidelines money or hoping to piggyback on a year-end surge driven by the sidelines cash finally being put to work. Their emphasis should start shifting to become positioned for a clean start on the next year.

On this score, I was intrigued by a recap on the CNBC site last week of recent on-air interviews entitled “Everyone’s Talking About a Year-End Rally“. Recommendations these “experts” had for you, the individual investor, included:

• Robert Howe, CEO of Geomatrix: the November-to-January period are the strongest months for investors.
• Michael Hasenstab, co-director and portfolio manager at Franklin Templeton Fixed Income Group: Investors must diversify and invest globally to benefit from from higher interest rates.
• Graham Secker, European equity strategist at Morgan Stanley: Expect a 10%-15% upside in European stocks in the next quarter
• Rahul Chadha, head of India equities at Mirae Asset Global Investments: Long-term investors who missed the emerging markets rally should increase their exposure; Indian markets remain fairly valued even as they trade at the high end of the historical range.
• David Bassanese, founder of PennyWise Investments: is overweight on Australia.
• Alex Wong, director of Asset Management at Ample Capital: sentiment remains positive for the Hong Kong market.
• Sandeep Malhotra, head of global investment strategies at Clariden Leu: the dollar will continue to erode; the growth story is in emerging markets.
• Mat Kaleel, chief investment officer at H3 Global Advisors: expects a correction in both oil and gold.
• Robert Howe, CEO of Geomatrix: Buy banks but be wary of property stocks as it is a volatile sector,
• Ed Ponsi, president of FXEducation.com: The dollar could see some short-term strength.
• Adrian Foster, Asia Pacific head of financial markets research at Rabobank: the dollar is range-bound for the next few weeks to come.
• Ray Attrill, global head of research at Forecast Australia: Expect lows for the dollar by mid-year and new highs for Aussie in the early part of 2010
• Mitul Kotecha, head of global FX strategy at Calyon Hong Kong: China will likely allow the yuan to appreciate by 5%-6% in 2010

Phew! Confusing to say the least. Besides that, I wind up on the other side of most of their trades. For example, in anticipation of what I see as strengthening in the Dollar into next year (see “One Reason the US Dollar Index Might Increase“), I liquidated most of my foreign currency and markets ETF positions, even the BRIC ones; I even added some EDZ (EDZ), 3x Emerging Markets Bear ETF.

This last one is a pure spec bet that everything must, at some put, in a correction. EDZ first started trading at the end of 2008, hit a high of 95.74 on March 2, and is now around 5.50. A 38% retracement is around 30 and 50% around 40 so there’s plenty of upside potential if foreign market’s top out and this extremely volatile ETF finds some firm ground. I’d be extremely happy if the ETF reached the lower resistance trendlines. I’m playing this but don’t recommend it for any but those who have willing to take the risk and lose.

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Comment by Heran Kim

2009-12-22 21:38:00

When you said correction of the market, About what percent of correction do you mean? In relation to the correction, what is your target of retracement with EDZ?

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