Bizcon Breakdown
Monday, January 21, 2008
In the world of policy debate we have an argument relating to business confidence, or "bizcon" for short. The argument follows that investors need to be confident that business will be able to deliver solid predictable returns; if not, then business confidence will break down, equity markets will tumble and the broader economy will be dragged along with it. I wasn't around trading during the last major confidence collapse, in the years between 2001 and 2003, so I'm not sure I've ever seen a true collapse in confidence before today, but I have no doubt that what we're witnessing right now is nothing short of a complete and utter collapse in confidence.
The Intrade recession 2008 contract closed at 76 today, its highest since the contract started trading last September.
That being said, this market is a mess, there is no point in trying to catch the falling knife anymore, there hasn't been since major moving averages and key support levels failed to hold. I feel like a genius for selling my Diamond Offshore (NYSE: DO) position at $145 - almost exactly at its top, but then again, I've made plenty of trading blunders in this market that make me much less of a genius in reality.
An amateur investor I know contacted me the other day asking if he should dump everything. He had made a killing (in unrealized gains) playing some high flying Nasdaq stocks, I don't know exactly what his current holdings look like, but if they are the same high flyers that looked so good on the way up, I can't even imagine the level of pain he is in right now. This little anecdote tells me two things. The first is that some players in the market are capitulating, selling everything out of fear of how bad its going to get, so there will inevitably be some snap back rallies along the way - don't buy them. The second thing it tells me is that there is a lack of confidence that high flying stocks can hold their gains, and those with a lot of air under them can and will come down hard.
I recently had another conversation with an acquaintance from the prop desk at Goldman Sachs (NYSE: GS) who sees another big leg down for US markets over the next year, but as a long-term position investor, he thinks in about a year from now there will be some real bargains in the market. I have to say I agree with this assessment. There are some stocks that look cheap now, but trading against the momentum is a dangerous game. The only way I can see getting long most stocks right now is through a strategy of averaging down. Buy small lots of stocks now and as the share prices fall, continue adding to the position. It is a difficult strategy that looks easy on paper and is incredibly difficult in reality, but may be the only way to beat this market on the long side right now.
Otherwise, cash is king and ultrashort ETFs from Proshares are the savior!
Posted by Rob Pitingolo 8:48 PM
