Thursday, August 28, 2014

Am I Too Bearish?

Perhaps I read way too much ZeroHedge, but I find that the guys there are often right about most of the things they say. The only problem is, the rest of the world is happily collectively wrong about it, until they finally realize it. The world can change in a New York minute.

I think the stupidest argument that pundits throw around is that "The market is still not as historically overvalued as we have seen in the past". Well, duh. The last time the stock market was this overvalued was back in the huge tech bubble. That didn't end too well, in case you are a bit foggy on the history.

John Hampton once again smashes the bull case. I have to give it to him, he is persistent and unwavering. The chart above from Hussman shows how the mania can actually be argued to be worse than in the tech bubble, since overvaluation is much more broad based. He attributes this bull rally mainly to multiple expansion and leverage, and cites marginal higher highs on extremely low volumes, coupled with a wide range of negative divergences to make the short-term move in the future biased to the downside. I find it extremely hard to argue with his analysis and data.

One of the guys that I really love reading is Lance Roberts. He tackles the best arguments that bulls throw out and offer plenty of reasons to discredit the arguments. He's not arguing for the sake of arguing, he's arguing because it makes sense. And the stock market continuing to rally for a long time does not make sense.

He was one of the few people that went against the entire herd and stuck his neck out on the line to say that interest rates will come down. He was beautifully correct. I think it was his article that I read last year that gave me the starting point to do more research and plunge into bonds. The bond portion of my portfolio is holding quite steady with decent gains, I must admit.

Another guy that swims against the crowd is Steen Jakobsen from Saxo Bank. The reason why I like him is because he gives actionable solutions at the end of his thesis, which basically cuts through the noise and make it a bit more binary. What use is it that we have information but we don't know how to use it?

The last thing is a reminder that doing nothing can be better than buying into a diversified portfolio of crap.

All the bulls have are that:
1) "Don't fight the Fed"
2) "cleanest dirty s***" of the developed markets
3) "investors are on the sidelines" (obviously not, refer to chart 2)

Most of the points that the bears bring to the table are hard facts and statistics. Can the mass delusion of investors continue? Sure it can. But this problem is a "When" problem, and not an "if" problem. It's going to come, so I don't mind looking like a fool sitting this part of  the rally out. I refuse to play "Greater Fools" with the rest of the market.

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